Taking a (tax) break in Puerto Rico

Kai Ryssdal Sep 29, 2006

KAI RYSSDAL: You know what Congress has managed to get done the past month it’s been in session. Antiterror legislation. And a couple of spending bills. What it hasn’t gotten done is almost anything else, including corporate tax reform. Which was on the agenda for a while. Until it wasn’t.

Tax breaks for businesses are nothing new. But companies are getting ever more creative in taking advantage of them. One great example is the pharmaceutical industry and its larger than usual presence in Puerto Rico. Jill Barshay’s been covering the story for Congressional Quarterly. Jill, welcome to the program.

JILL BARSHAY: Thank you.

RYSSDAL: Puerto Rico’s a nice place and all. Nice beaches, nice smooth rum, all that good stuff. How did it become the manufacturing center of the pharmaceutical industry in this country?

BARSHAY: It became the center of the pharmaceutical industry in the 1960s. They were lured there by the U.S. Congress that had a very generous tax break for American companies that wanted to manufacture down there. And it was so generous by the late ’80s that they were getting $78,000 from U.S. taxpayers for every job they created down on the island.

RYSSDAL: So, where did these tax breaks come from. Why did it happen?

BARSHAY: The tax breaks began in 1921, about 20 years after the Spanish-American War. And originally it was to help American companies compete in the Philippines. And then later, when the Philippines went independent, Puerto Rico was the largest of the territories and U.S. companies started applying this great tax break down there.

RYSSDAL: Tax breaks are, of course, expensive. And back in the ’90s the Congress and the Clinton administration saw this tax break for the pharmaceutical industry. They wanted to do some other things with the money. They started phasing it out. Do I have that right?

BARSHAY: That’s exactly right. But there was very strong lobbying from the pharmaceutical industry to keep it. So, instead of getting rid of it right away, they allowed them a very slow, gentle phase-out. And the end of the phase-out finally happens in November of this year.

RYSSDAL: And one would think, then, that the pharmaceutical industry would be paying more taxes. But what your reporting shows is that that’s really not the case.

BARSHAY: Right. We looked at what happened 10 years after Congress took this action. Congress thought it would raise $10 billion in the last 10 years. And it appears that the pharmaceutical industry found some clever accountants and tax attorneys, and they realized they could re-register as foreign companies in Puerto Rico and pay no taxes at all down there.

RYSSDAL: How are they getting away with this, though, the pharmaceutical industry. I assume what they’re doing is all legal.

BARSHAY: Absolutely legal. They just read the tax code very carefully. According to U.S. tax law, only the 50 states plus the U.S. District of Columbia is subject to federal taxation. And they realized they could register as foreign companies just as if they were operating in France or Italy or Japan. And yet, they’re on U.S. territory, taking advantage of FDA regulations, so if there’s any patent issues, any corporate espionage, they have full protection of U.S. laws.

But there’s just one catch. You can’t bring the money back home to the United States. It has to stay abroad. So, it’s a really interesting outcome where, previously, it was a generous tax break but at least the profits came back home to the United States. Maybe in the form of executive jets and stock options for executives — who knows.

RYSSDAL: How important is Puerto Rico to the pharmaceutical industry?

BARSHAY: It’s huge. Of the top 20 drugs sold in the United States, 14 of them are produced in Puerto Rico. We’re talking Lipitor, the cholesterol fighter; Norvasc, which reduces high blood pressure; the antidepressant Zoloft . . . Fifty-two blockbuster drugs are made in Puerto Rico, amounting to about $100 billion of sales.

RYSSDAL: On the face of it what we have here is a story about the pharmaceutical industry that you’ve written. But really it’s a story about the tax code, and about how companies, if they work hard enough, can do almost anything they want.

BARSHAY: In our global economy it is increasingly easy for companies to use perfectly legal strategies in the tax code to shift profits to different places. And part of the juice of using Puerto Rico as a tax haven is because we’re in a knowledge-based economy where companies have intangible assets. And so it’s a problem not just in Puerto Rico, but any global company can shift their assets and their profits between different tax jurisdictions and it’s impossible almost for any nation to make sure that the income being produced on their territory is being properly taxed.

RYSSDAL: Jill Barshay is a writer with Congressional Quarterly. Jill, thanks a lot for your time.

BARSHAY: Thank you.

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