Martin A. Sullivan – who writes for some very good articles for Tax Analyst – had been making a major issue of the following:
Moving profits from the United States to low-tax jurisdictions is the way prosperous U.S. pharmaceutical companies keep their taxes low. And that domestic-to-foreign shift has clearly accelerated in recent years. By Tax Analysts’ calculations, in 1999 foreign profits accounted for 39.2 percent of worldwide profits of large U.S. drug companies. By 2005 that percentage had jumped to 69.9 percent … When one affiliate of a multinational corporation makes a sale or loan to another affiliate, profits are shifted. When the terms of the transactions are set so that affiliates in low-tax countries get the better deals, the low-tax affiliates get larger shares of the profits and the multinational group reduces its overall income tax burden … Pharmaceutical companies own a lot of marketing intangibles and patents that are developed in one or just a few locations and then used worldwide. Determining fair terms for interaffiliate transactions involving intangible assets involves a great deal of subjective judgment, so those determinations are a constant source of conflict between drug companies and the IRS. The data strongly suggest the IRS is losing the battle.
This is the point made by David Cay Johnson in his chapter entitled Letters to Switzerland. I know we Angrybears have made the general point before as has Martin Sullivan. I just wanted to thank Mr. Sullivan for reminding us again.