The biotechnology company Amgen Inc. is currently engaged in a heated dispute with the Internal Revenue Service (IRS) regarding the company’s international tax strategy as well as the 10.7 billion dollars in back taxes and penalties that the IRS claims the company is responsible for paying.
According to the Internal Revenue Service (IRS), Amgen improperly attributed what the agency believes should have been U.S. profits to a Puerto Rico subsidiary that oversees the manufacturing of the company’s drugs between the years 2010 and 2015. This caused Amgen’s taxable income to be underreported by nearly $24 billion during that period.
The dispute between Amgen and the Internal Revenue Service (IRS) is the most recent illustration of increased government scrutiny of the international tax practices of companies in a variety of industries, including the pharmaceutical and technology sectors.
The dispute has put downward pressure on Amgen’s share price and increased the likelihood that the company’s tax rate will be significantly increased going forward if the IRS is ultimately successful.
According to data provided by FactSet, Amgen has traditionally maintained one of the lowest effective tax rates in the pharmaceutical industry.
Over the past decade, the company has reported a median effective tax rate of 12.5 per cent, which compares to an 18 per cent median rate among the 10 largest drug companies in the United States.
The low tax burden is primarily the result of Amgen’s manufacturing operations being located in low-tax Puerto Rico, which is a territory of the United States but is treated as a foreign country to calculate corporate income tax.
According to a spokeswoman for Amgen, the Internal Revenue Service was in agreement with the proportion of profit that should be allocated between the company’s operations in Puerto Rico and the United States until very recently.
Our allocation of profit recognizes the key contributions made, the risks taken, and the significant equity value of our Puerto Rico subsidiary, the spokeswoman said.
“Our tax returns have always been compliant with the law, and they reflect our position that the appropriate allocation has not changed.”
Amgen claims that the Internal Revenue Service (IRS) has been in agreement with its methodology for allocating profits between its manufacturing operations in the mainland United States and Puerto Rico since at least 2007 when this picture was taken.
The Internal Revenue Service (IRS) did not provide a comment, as is typical of its behaviour in pending litigation.
Amgen, with headquarters in Thousand Oaks, California, was an early contributor to the field of biotechnology. It is now one of the largest pharmaceutical companies in terms of sales worldwide.
Enbrel, a treatment for arthritis, and Prolia, a treatment for osteoporosis are two of the company’s drugs, both of which helped contribute to the company’s revenue of nearly $26 billion last year.
According to Brian Skorney, an analyst with Robert W. Baird & Co., investors have long admired Amgen’s low tax rate because it aided the company in consistently beating analysts’ quarterly earnings estimates. This was one of the reasons why investors have been attracted to the company.
In 2013, the company posted a 3.5 per cent effective tax rate for the year, compared with a 35 per cent rate under federal law in the U.S. at the time, according to Amgen’s annual financial report.
“At the time, shareholders were like, ‘Oh my God, they’re so good at tax accounting,’” Mr Skorney said. Yet in retrospect, “that was a pretty negative signal that the IRS was probably going to come knocking,” he said.
Amgen said its 2013 tax rate was unusually low because of several factors, including a large acquisition and a federal tax credit retroactively reinstated by Congress. Amgen’s annual report for that year said its foreign profits reduced its tax rate by 21.3 percentage points in 2013.
In addition to billing Amgen for back taxes and penalties for 2010 to 2015, the IRS is currently auditing Amgen’s tax returns for 2016 to 2018, the company has said.
Amgen is fighting the claims made by the IRS in the United States Tax Court, and the company has stated that it anticipates the matter will be resolved over years.
In documents submitted to the Tax Court, the corporation asserted that it correctly assigned its revenues to the jurisdictions in which those profits were generated.
Investors have long applauded Amgen’s low tax rate since it has enabled the business to consistently outperform analysts’ quarterly earnings expectations. This is one reason why Amgen has been so successful.
In court filings, Amgen stated that the IRS audited the company’s methodology for the eight years before 2010, but that the agency never objected to the company’s practices or advised the business that it needed to make adjustments.
According to Amgen, the Internal Revenue Service’s decision to retroactively adopt a different pricing methodology and impose fines on the corporations is both arbitrary and capricious. In general, the IRS considers each year’s tax filing to be its own entity.
The corporation also claimed that the Internal Revenue Service did not accurately account for the value of its manufacturing operations in Puerto Rico. Amgen has stated that it has made capital investments totalling $4 billion in its operations in Puerto Rico and that it employs 2,400 people on the island.
In addition, the company stated that the Internal Revenue Service (IRS) made certain calculations that resulted in an overestimation of the amount of tax that it owes by approximately $2 billion.
The Internal Revenue Service (IRS) as well as lawmakers have been conducting an investigation into the international tax practices of U.S. companies.
Both the Coca-Cola Company and Meta Platforms Inc. are currently engaged in legal battles with the Internal Revenue Service (IRS) over the appropriate method of valuing internal transactions that led to overseas profit concentrations.
The use of foreign subsidiaries by the pharmaceutical industry to avoid paying domestic taxes on sales of prescription drugs in the United States is the subject of an investigation by the Senate Finance Committee.
In July, the committee released a report that outlined how AbbVie Inc. lowers its tax payments for U.S. sales of its best-selling medicine Humira by keeping its patent rights under a Bermuda subsidiary, where it has neither employees nor significant operations, and manufacturing the medicine in Puerto Rico. The report also provided specific examples of how this strategy works in practice.
AbbVie didn’t respond to a request for comment.
Amgen is one of the many healthcare companies that have been awarded tax-incentive grants by the government of Puerto Rico. These grants were created to lure high-paying jobs to the U.S. territory of Puerto Rico.
Amgen does not disclose its effective tax rate in Puerto Rico; however, the company stated that its operations in Puerto Rico were a significant factor in its global tax rate of 12.1 per cent, which is lower than the statutory rate of 21 per cent in the United States.
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The place where value is created is given priority by the tax law in its analysis of where profits are earned. Although profits don’t need to correspond to the location of sales, most of the time they do.
Pharmaceutical companies, on the other hand, are dependent on patents that are simple to relocate and have traditionally maintained larger gaps between the locations of their economic activity and the locations of their profits.
According to the company’s filings with the Tax Court, Amgen determined its taxable income in the United States based on a complicated set of transactions involving its subsidiaries located on the mainland of the United States and in Puerto Rico.
In 2002, Amgen began licensing intellectual-property rights to its Puerto Rican unit, which it referred to as Amgen Manufacturing Ltd. or AML.
In exchange for royalties, AML was given permission to manufacture and sell Amgen’s drugs. In return, the Puerto Rican division of Amgen agreed to pay a separate Amgen subsidiary a guaranteed profit in exchange for the right to sell the drugs in the continental United States.
