Gilead’s Use Of Patents For $10B Tax Dodge Could Ignite Move For Policy Change 13/07/2016 by William New, Intellectual Property Watch Leave a Comment Share this:Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Facebook (Opens in new window)Click to email this to a friend (Opens in new window)Click to print (Opens in new window)Gilead is the US company whose use of patents to charge $1000 per pill for a hepatitis C medicine in the United States helped make high drug prices a developed country household issue and fodder for elected officials seeking change. Now the company has come under further fire after being found to have moved some US$10 billion overseas to avoid US taxes – even after having received US taxpayer support for its activities – which it orchestrated by moving its patent rights overseas. A new report detailing the company’s tax dodge includes a proposal for a way to clamp down on this type of patent activity. “Prescription drug maker Gilead Sciences is raking in billions of dollars a year in windfall profits from public health programs and consumers for exorbitantly priced hepatitis C (HCV) medications developed with taxpayer dollars,” the group Americans for Tax Fairness said in its report [pdf] released today. “It then shifts those profits to offshore tax havens, allowing it to dodge nearly $10 billion in U.S. taxes by the end of 2015.” “Taxpayers subsidized the development of Gilead’s HCV drugs, yet now pay sky-high prices for them through Medicare, Medicaid, the Department of Veterans Affairs, private insurance and from their own pockets,” the group said. “The Food and Drug Administration assures Gilead’s products are safe, and the American patent and legal systems ensure that the corporation’s huge profits are protected. But despite all the benefits Gilead has received from taxpayers, Congress maintains a loophole-ridden tax system that has allowed the company to dodge taxes that pay for those benefits, leaving other taxpayers to pick up its tab.” Combined with the already roiling issue of exorbitant prices could have the potential to ignite a move for change in public policies. The report calls for a series of actions such as closing of the deferral loophole. It highlights various congressional efforts already underway. But this time, change may also involve patent policy. The Patent Trick The company appears to have begun the process by shifting its economic rights to the US patent for Sovaldi over to Ireland in 2013. This “most likely” created a patent licensing arrangement allowing it to report lower US profits and therefore pay much less in taxes, Americans for Tax Fairness said. “Gilead claimed that despite booking two-thirds of its revenues here and charging higher drug prices than anywhere else in the world, it made only about one-third of its profits in the United States,” says the report. “How could that be possible? The most likely explanation is transfer pricing,” it said. “This accounting trick involves sending valuable assets—such as the license to use prescription drug patents—to a company’s offshore subsidiaries. Those subsidiaries can then impose large licensing fees on the U.S. parent company for the right to sell the patented medications in America. The fee costs reduce the reported U.S. profits and resulting taxes, while the fee income goes offshore where it is taxed lightly or not at all.” “In early 2013, Gilead’s chief financial officer announced on a conference call with stock analysts that the formula for Sovaldi had been “domiciled” in Ireland, a well-known tax haven, which she said would allow the company’s tax rate to “decline over time.” “This meant that Gilead had transferred the economic rights to its Sovaldi patent to an Irish subsidiary and created a patent licensing arrangement that would enable it to report lower U.S. profits and, therefore, pay much less in federal taxes,” it continued. “Of course, the drug was actually developed in the United States with all the attendant, taxpayer-funded benefits: supported with federal research money, studied and approved by the Food and Drug Administration, and granted an American patent, which receives the full protection of the U.S. legal system.” Patent Proposal The report notes the power of the federal government to override patents when necessary. It also includes a proposal to address the transfer pricing problem. It refers to a law journal article due out this year by Andrew Blair-Stanek, which proposes a solution to extremely high drug prices and tax dodging through offshore transfer pricing. “[T]ransfer pricing occurs when a parent corporation severely undervalues intellectual property — such as a drug formula — it “sells” to an offshore subsidiary, and then the subsidiary licenses that property back to the parent at a huge premium,” the report said. “The effect is to minimize the amount of money coming to the United States, where it faces taxation, and maximize the amount of money going to offshore tax havens, where it faces little or none.” “[T]he U.S. government has the power to override patents — such as on drug formulas — when necessary for the public good, as long as the patent holder is fairly compensated. In the case of companies that have sent their valuable patents offshore with ridiculous price tags attached, [Blair-Stanek] would have the government use that undervalued price as the ‘reasonable’ compensation.” “Pharmaceutical companies like Gilead that severely overprice important medications would either have to assign realistic prices to their offshored drug patents — thereby spoiling their transfer-pricing tax dodge — or accept a tiny price for those patents, minimizing the cost of government intervention and thus making their drugs even more affordable,” it said. “Very possibly, companies would strike a balance between the two, curbing both their tax dodging and price gouging.” Outrage May Ensue The 32-page report goes into further detail of how public funds were used for the research into the drugs, and how Gilead executives gained the most. The company’s CEO John Martin, who stepped down this year, has been one of the top few highest paid executives in the country for years, the report said. The news of the company’s shift of assets to gain from a lower tax rate brought immediate reaction from public health groups. “Gilead’s billions of dollars in tax avoidance show its priorities are focused on increasing profits at any cost and at the expense of public health,” Tahir Amin, co-founder of I-MAK, said in a statement. “Not only has the pharmaceutical company pursued unmerited patents for old science that was previously in the public domain, Gilead is further manipulating its claim on Sovaldi’s intellectual property to avoid paying billions in U.S. taxes.” The California-based company could not be reached for comment at press time, but its website showed no sign of response to the accusations. It did, however, include a boast that it recently was ranked by a journal as a “Top Corporate Philanthropist.” According to the group, Gilead is the sixth most valuable pharmaceutical company in the world, with a $146 billion market value last year. Its profits mainly come from two extremely expensive drugs. Sovaldi went on the market at the end of 2013 for $84,000 for a 12-week course, or $1,000 per pill. It is estimated to cost $100 to $1,400 per course to produce and generic versions are cheaply available in other countries. The other drug is Harvoni, which combines Sovaldi with another drug at $94,500 for the full treatment and came out in late 2014. Prices have been driven downward since then but are still considered high, the report said. And a new drug, Epclusa, was announced last month at $75,000 per treatment, about $900 per pill. “Altogether,” the report said, “America’s public and private sectors spent more money on Sovaldi in 2014 — nearly $8 billion — than on any other prescription drug.” Share this:Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Facebook (Opens in new window)Click to email this to a friend (Opens in new window)Click to print (Opens in new window) Related William New may be reached at email@example.com."Gilead’s Use Of Patents For $10B Tax Dodge Could Ignite Move For Policy Change" by Intellectual Property Watch is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.