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In Search for Deficit Busters, CBO Eyes Offshore Profits

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By Mari Serebrov
Washington Editor

With Congress searching for ways to reign in the federal deficit, the Congressional Budget Office (CBO) has a suggestion: Change the way offshore profits of multinational companies are taxed.

While biopharma and other multinational companies might chafe at the bit, the CBO noted that moving closer to a purely worldwide corporate tax system that limits or eliminates deferral of U.S. taxes on income earned abroad could boost tax revenues by more than $100 billion over a 10-year period.

However, the agency also recognized that such a move could give firms more of a reason to buck the U.S. and incorporate abroad or be acquired by or merge with foreign companies.

As it is, U.S.-based drugmakers are already paying more in taxes than competitors in other countries.

The average 2011 statutory tax rate among the 33 other members of the Organisation for Economic Co-operation and Development (OECD), when weighted by gross domestic product, was about 19 percent, according to a CBO report released this month.

The highest U.S. corporate tax rate, for annual income exceeding $10 million, is 35 percent. That rate increases to about 39 percent when state and local corporate taxes are added.

Currently, multinational companies can defer U.S. taxes on income earned abroad by their subsidiaries until that income is "repatriated," or remitted, to the U.S.-based parent company.

The deferral creates incentives for U.S. firms to invest and retain earnings in low-taxing countries rather than investing at home. It also "encourages them to artificially shift reported income abroad and between foreign countries," the report said.

By doing so, the tax system bridles economic efficiency, the CBO pointed out, because companies are allocating their resources to lower their tax burden rather than seeking the most productive use of those resources. As a result, such practices not only lower federal tax revenue but reduce the returns to shareholders.

While the CBO report makes no recommendations for how multinational companies should be taxed, it identifies and sizes up a number of policy options. Moving to a worldwide system that eliminates the deferral would produce the biggest increase in tax revenue, it said.

Other options include moving toward a territorial system that exempts foreign income from U.S. taxation and corralling opportunities to reduce U.S. taxes on foreign income from low-tax countries or to shift reported income abroad.

While a territorial system could still lead to an inefficient allocation of resources if a company is motivated by finding the lowest tax rates, such a shift could "increase U.S. tax revenues by restricting the ability of multinationals to shield some income from U.S. taxation and by preventing them from deducting costs incurred abroad from income earned" at home, the CBO said.

One option that's noticeably missing from the report is reducing the U.S. tax rate to bring it in line with that of other OECD countries to encourage investment at home.

FDA Issues Combination Product Rule

In response to requests for a clear regulatory framework for products that combine devices, drugs or biologics, the FDA has finalized a rule clarifying how good manufacturing practices (GMPs) should be applied to combination products.

The rule, to be published in the Federal Register Tuesday, is nearly identical to a proposed rule issued in September 2009 that offered two options for demonstrating compliance with the GMP requirements applicable to a co-packaged or single-entity combination product, according to the FDA.

The rule allows companies to either demonstrate compliance with all the GMP regulations applicable to each of the constituent parts or, under certain conditions, demonstrate compliance with the specifics of either the drug GMPs or the device quality system regulation.

Depending on the constituent parts of the product and what manufacturing practices are used, different GMP requirements will apply. The final rule is intended to "help ensure a consistent and appropriate application and enforcement of these requirements," the FDA said.

Along with the new rule, the FDA released a draft guidance to help manufacturers determine the type of marketing submission required for post-approval changes to a combination product.

The guidance specifically addresses instances when the modified part differs from the application type under which the product was approved – i.e., a biologics change in a product approved as a device.

Comments on the draft guidance are due by April 22.