Pharmaceutical Manufacturing Can Lift Puerto Ricans Out of Poverty
Changes to the island’s corporate tax code can return drugmakers from China, India, and Ireland.
Of the more than three million people who live in Puerto Rico, nearly half live in poverty. Poverty is nothing new for the island territory, but as I write in Forbes, the largest driver of Puerto Rico’s recent economic woes is U.S. tax policy. Coincidentally, the U.S. tax treatment of Puerto Rican corporate income is also a significant driver of American dependence on Chinese pharmaceutical ingredients in the wake of the coronavirus outbreak.
As I explain:
Until relatively recently, Puerto Rico was a dominant player in the manufacture of prescription drugs. The reason? Taxes.
In Gerald Ford’s last year as President, the Democratic Congress passed — and Ford signed — the Tax Reform Act of 1976, which exempted from taxation corporate income generated in U.S. territories, like Puerto Rico, Guam, and the U.S. Virgin Islands. This policy, combined with Puerto Rican tax law, meant that corporate subsidiaries based in Puerto Rico enjoyed a zero percent corporate tax rate, so long as they distributed their profits as dividends.
Pharmaceutical companies were well suited to take advantage of this tax break — contained in Section 936 of the Internal Revenue Code — for drug manufacturing. Companies could base their manufacturing operations in Puerto Rico, and thereby significantly reduce their U.S. tax burden. A 1993 report from the U.S. Government Accountability Office estimated that pharmaceutical companies represented, by far, the largest beneficiaries of the Puerto Rican corporate tax system, benefiting to the tune of $86 million in 1985…
The end of Section 936 dispersed the global pharmaceutical manufacturing industry to other parts of the globe. Many manufacturers of branded pharmaceuticals moved their factories to Ireland, which has a low 6.25 percent corporate tax rate for revenue tied to patents or other intellectual property. Ruthless price competition among manufacturers of older, generic medicines drove those supply chains to China and India. A U.S. Department of Commerce study found that 97 percent of the antibiotics used in the U.S. now come from China. 40 percent of over-the-counter and generic prescription drugs used in the U.S. now come from India…The loss of pharmaceutical industry jobs helped crash Puerto Rico’s economy.
We can bring many of those pharmaceutical jobs back to Puerto Rico, with a set of targeted reforms:
- Eliminate corporate taxes for income from generic drug manufacturers in Puerto Rico;
- Reduce corporate taxes for income generated from patents and other intellectual property domiciled in Puerto Rico;
- Pay for these reforms by phasing out the tax exemption for Puerto Rican bonds that has worsened the island’s fiscal problems.
