The biopharmaceutical industry could be one of the big winners from US President Donald Trump's recently released tax reform proposals.
The proposals, released last week, were headlined by a dramatic reduction in the US corporate tax rate, from 35 per cent to 20 per cent, bringing it largely into line with the UK.
They also include a shift to a system of territorial taxation for multinational companies, which would significantly reduce the tax on earnings from outside the US, and a special one-off concessional tax rate to make it more attractive for US-based companies to repatriate profits from overseas-based entities.
Industry leaders, led by Pfizer CEO Ian Read, have consistently argued the comparatively high corporate tax rate in the US is shifting investment overseas and undermining the country's competitiveness.
The Australian corporate tax rate, which currently sits at 30 per cent for large companies, is being progressively lowered to 25 per cent for small to medium enterprises. However, local business leaders have already expressed concern over the impact of President Trump’s proposals on investment in Australia.
The US-based life science industries responded to the comparatively high corporate tax rates, and the limitations it imposed on repatriating profits from overseas, by engaging in mergers with companies based in lower taxing jurisdictions overseas.
These mergers, often referred to as 'tax inversions', saw companies redomicile their headquarters to countries like Ireland, where the corporate tax rate is 12.5 per cent. These ‘tax inversions’ enabled the more tax effective repatriation of profits accumulated in overseas-based entities.
The former Obama administration responded by introducing a raft of new tax laws that made them far less attractive.
As a result, Pfizer scrapped a proposed merger with Ireland-based Allergan and AbbVie shelved a merger with Shire, which is also based in Ireland. The mergers would have seen the US-based companies, Pfizer and AbbVie, redomiciled to Ireland.
Ironically, just last week a federal court based in Texas struck down the Obama administration's anti-inversion laws, agreeing with a business group they were “arbitrary and capricious” because they were introduced without the notice or opportunity for comment required under US tax law.
Significant doubts remain over the prospect of Mr Trump winning congressional support for his proposals, given his administration’s failure to win support for other key reforms, notably in healthcare.
However, if backed, the proposals would make the US are far more attractive investment location and potentially undermine Australia’s goal to grow the biopharmaceuticals and medical device sectors.