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Repatriation Reprise: House Bill Offers Tax Breaks For R&D, Manufacturing Investments

Domestic drug development could be a major beneficiary if Congress enacts legislation that calls for a tax holiday on overseas earnings brought back to the U.S. for job creation.

Such a tax break could put billions of dollars in drug companies' U.S. coffers for investment in America.

One recent estimate put the overseas cash holdings of seven major U.S. drug makers at about $46.6 billion as of the end of the third quarter of 2010. Moody's and others calculate that in general, multinational U.S. pharma companies keep about 30% to 50% of their cash offshore (Also see "So Much Cash For Pharma, But Nowhere To Spend It" - Pink Sheet, 20 Dec, 2010.).

Rep. Brian Bilbray, R-Calif., wants to maximize return of that money for U.S. investment and job creation by allowing foreign earnings to be repatriated tax-free if it is used for research and development and expansion.

His Job Creation and Innovation Investment Act (H.R. 1036), would tax other repatriated funds at what amounts to 5.25%, well below the 35% currently assessed on returning corporate income. The lower net rate is achieved by taxing only 15% of any repatriated money at the full rate.

The 5.25% rate is the level that was set under a 2004 repatriation law (which allowed low-rate transfers in 2005 and 2006) and could be the route taken in the Democratic-controlled Senate, where repatriation failed in 2009 (Also see "Tight Credit Renews Interest In Lowering Tax On Repatriated Income" - Pink Sheet, 9 Feb, 2009.).

Boxer Remains Committed

Sen. Barbara Boxer, D-Calif., who sponsored the 2004 and 2009 legislation with Sen. John Ensign, R-Nev., remains committed to bringing foreign earnings home, but has not indicated whether she would support something other than the 5.25% rate.

Responding to President Obama's call for corporate tax reform in his State of the Union address, Boxer contended that this exercise "should include allowing our companies to bring their foreign earnings back to this country at a lower tax rate to invest in creating new jobs and expanding their businesses"

Discussions are ongoing with regard to the pathway for action and the content of a measure. Failure of the Boxer/Ensign bill in 2009 followed in the wake of a Congressional Research Service report that companies cut jobs following repatriation in 2005 and 2006. With that as an issue, Democrats are likely to insist on legislative wording to ensure companies receive a tax break only if they achieve the goals of the legislation.

Bilbray's bill provides the zero tax option if funds are invested in job-creating activities within three years of repatriation. The lower tax rates would be allowed either in the year the bill is passed or the next taxable year.

Academia could benefit from the provision allowing expenditures on proof-of-concept centers, which the bill says includes "activities within public and private institutions and universities, which advance inventions by assessing and validating commercial feasibility of products or processes, including prototype development."

The importance of pharma R&D to the economy is underscored by survey results released March 15 by the Pharmaceutical Research and Manufacturers of America showing that industry spent $67.4 billion in 2010 on that endeavor.

PhRMA members spent an estimated $49.4 billion of that amount, a 6.5% increase from 2009, according to the survey, conducted with Burrill & Company. PhRMA companies invested more than 75% of their research dollars in the U.S.

During the past decade, according to the survey, about 19% of biopharmaceutical companies' domestic sales went to R&D, and that rose to 20.5% in 2010.

PhRMA also cited a recent report from Archstone Consulting that found that 655,000 people in the U.S worked for biopharmaceutical research companies in 2008, the most recent year for which data were available; each of these jobs supported 3.7 additional jobs.

By Cathy Dombrowski


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