Tax legislation passed by the House Republicans in November proposed reducing the federal corporate tax rate from 35 percent to 20 percent.1 Doing so could help put US companies on more equal footing with foreign competitors when deciding where to invest in operations, how to structure their organizations and where to hold profits. It also could help spark new foreign investment and competition within the US.
Of interest to businesses with foreign holdings—which includes many pharmaceutical and life sciences companies—is the transition from a worldwide to territorial tax system. Under the US’s current worldwide taxation policy, the amount of money held by US companies overseas has steadily increased because foreign earnings are subject to the US corporate tax rate only when they are repatriated to the US.2 In contrast, under a pure territorial tax system, foreign earnings would be taxed in the country where the profits were generated but not a second time when earnings are brought back into the US. This would give companies greater flexibility in how and where they spend their money.
As part of a territorial system, tax reform proposals have included a one-time mandatory deemed repatriation of US companies’ historic foreign earnings. Healthcare companies hold about 25 percent of the approximately $1.8 trillion currently held overseas by the 50 companies with the largest amount of indefinitely reinvested foreign earnings—the second largest share held by any industry (see Figure). Repatriation would give these companies a chance to bring these profits back into the US at a special tax rate.3
Pharmaceutical companies—and other organizations rich in intellectual property—are concerned that efforts to limit possible erosion of the US corporate tax base under a territorial system could target income from intangible assets.4 A so-called “round trip rule” would impose US tax on profits generated overseas related to products exported for sale to the US.
“Without a doubt, the round-trip rule is the biggest thing we’re worried about,” said David Lewis, vice president of global taxes at Eli Lilly. “We’d be back to where we started; once again we’d be at a strategic disadvantage.” Facing higher tax rates and less flexibility with where to spend capital, companies fear the tax could make them targets for takeover by foreign companies.
For-profit companies that do most of their business domestically—like many health insurers and providers—are interested in proposals that would allow businesses to fully expense the cost of new depreciable assets, excluding structures, which could prompt investment in fixed capital and accelerate acquisitions.
Tax-exempt healthcare organizations are concerned about potential changes affecting charitable giving, such as repeal of the estate tax, a tax imposed on estate assets exceeding $5.49 million per person. Eliminating the tax could weaken the incentive for individuals to make philanthropic donations rather than bequeathing assets to beneficiaries. Tax-exempt organizations also are watching for proposals that affect standards for income tax exemption and excise taxes.