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Louis Jacobson
By Louis Jacobson January 6, 2022

Proposed tax changes would have unclear impact on pharmaceutical manufacturing

As a presidential candidate, Joe Biden promised to change the tax code in ways that would encourage pharmaceutical manufacturing to be based in the United States, rather than overseas.

Several of Biden's tax proposals have advanced, though they would have an uncertain impact on the pharmaceutical industry.

After taking office, Biden proposed several tax changes that could affect the production decisions of pharmaceutical companies, said Thornton Matheson, a senior fellow at the Urban Institute-Brookings Institution Tax Policy Center.

(Warning: We're about to enter the weeds of international tax policy.)

One change would affect the global intangible low-taxed income, or GILTI. This refers to the income earned by foreign affiliates of U.S. companies that exceeds a 10% return on their tangible assets. Currently, a U.S. corporation must include half of the GILTI income earned by its foreign affiliates in the gross income that is subject to the U,S. corporate income tax. However, it can claim a tax credit for 80% of the foreign tax paid on GILTI.

Notably, under the current rules, a multinational corporation might be able to avoid GILTI taxation by "blending" income earned in low tax-rate countries with income earned in high-tax rate countries, effectively sidestepping much of the tax bite.

Biden's Build Back Better legislation, which has passed the House and is now being considered by the Senate, would change how GILTI operates. It would effectively bar cross-country "blending" strategy and would increase the effective tax rate on GILTI from 10.5% to 15%.

The second provision that could affect pharmaceutical manufacturing involves foreign-derived intangible income, or FDII. This refers to U.S. income from the sale of goods and services abroad that exceeds a 10% return on domestic tangible assets. 

Currently, U.S. corporations can take a 37.5% deduction from the 21% corporate tax for foreign-derived intangible income, resulting in an effective 13.125% tax rate.  .

Both of these changes "could have both positive and negative effects" on the pharmaceutical sector's decisions on where to base their production, Matheson said. 

For instance, "GILTI reform makes it less advantageous to invest offshore, but it increases the pressure for 'inversion.'" Inversion refers to U.S. corporations being acquired by a foreign entity, with shareholders continuing to own the corporation indirectly through their ownership of the foreign acquirer's shares.

Biden's proposals may not have a dramatic impact on pharmaceutical manufacturing choices, and they face a challenging road in the Senate. But they are still alive. We rate this promise In the Works.

Our Sources

Urban Institute-Brookings Institution Tax Policy Center, "Briefing Book: A citizen's guide to the fascinating (though often complex) elements of the US tax system," accessed Jan. 5, 2022

Tax Foundation, "Options for Reforming the Taxation of U.S. Multinationals," Aug. 12, 2021

Proskauer Rose LLP, "Senator Manchin Announces That He Will Not Support the Build Back Better Act – Where Things Stand Now," Dec. 19, 2021

Email interview with Jesse Solis, media relations manager for the Tax Foundation, Jan. 5, 2022

Email interview with Thornton Matheson, senior fellow at the Urban Institute-Brookings Institution Tax Policy Center, Jan. 4, 2022

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