Tariffs Jeopardize Big Pharma's Tax Shelter --- The segment reaps most of its profits in the U.S. but shifts its tax burden to havens such as Ireland

"Pfizer in 2019 sold $20 billion of drugs in the U.S. Its federal tax bill: zero.

That revelation was part of a Senate Finance Committee investigation done by Democratic staff, released in March, that examined how U.S. pharmaceutical giants exploit a loophole created by the 2017 Trump tax overhaul to shift profits offshore.

The strategy has been great for Big Pharma's bottom line -- and for countries such as Ireland, too. But as President Trump's trade war picks up steam, that model could start to unravel.

Trump has already singled out pharma companies and countries like Ireland that reap the benefits of tax-avoidance moves. Despite its small size, Ireland ran an $87 billion trade surplus with the U.S. last year -- larger than any country except China, Mexico and Vietnam.

"Ireland was very smart," Trump said last month. "They took our pharmaceutical companies away."

On Wednesday, Trump announced sweeping reciprocal tariffs, citing the barriers other nations impose on U.S. goods. The measures include a 20% tariff on the European Union and are expected to impact nearly every industry. Major pharmaceutical companies are lobbying for exemptions, arguing that the tariffs would harm patients and discourage investment in research and development.

A PwC analysis estimates annual tariffs on pharmaceuticals and medical devices could soar from $500 million to $63 billion. If country tariffs are followed by sector-based ones that include pharmaceuticals, they could work as a double tariff of sorts.

Unlike countries such as China, Ireland didn't rack up its trade imbalance by becoming a low-cost manufacturing hub. Instead, it did so by offering an advantageous tax regime that has attracted U.S. companies -- particularly in tech and pharma -- seeking to reduce their tax bills by shifting intellectual property, or IP, overseas.

By booking most of their taxable income in foreign subsidiaries in countries such as Ireland, American pharmaceutical companies like Pfizer, AbbVie, Johnson & Johnson, Bristol-Myers Squibb and Merck have managed to pay little in income tax in the U.S. -- despite generating the bulk of their profits here.

In 2023, Ireland accounted for about 40% of the U.S.'s $101 billion trade deficit in biopharmaceuticals, according to UBS analyst Trung Huynh.

"We're gonna try to fix a whole bunch of these tax scams," U.S. Commerce Secretary Howard Lutnick said on the All-In podcast recently. "Ireland is my favorite. . .You'd say, Ireland, what do they do? Oh, they have all of our IP."

For Big Tech companies, a U.S. tariff hike would be an inconvenience -- but one that could be managed with some legal and accounting maneuvers.

Big Pharma has a bigger problem: It has made Ireland a critical hub not just for profit shifting but for manufacturing as well. That setup could become a liability that companies can't easily walk away from, said Brad Setser, a senior fellow focused on global trade at the Council on Foreign Relations. "Your tax strategy runs squarely up against the tariff," he said.

A Pfizer spokeswoman wrote that the information published by Senate Finance Committee ranking member Ron Wyden (D., Ore.) isn't an accurate portrayal of the 2017 Tax Cuts and Jobs Act's effect on Pfizer. She said Pfizer has paid more than $12.8 billion in income taxes in the U.S. over the past four years.

Pharmaceuticals have historically been exempt from tariffs to protect patient access to essential medicines. That means the industry is now scrambling to prepare, said Chris Desmond, a leader in the U.S. Global Trade Services team at PwC.

To reduce their tariff burden, companies are dissecting a drug's price to separate the physical components -- such as ingredients and packaging -- from intangible ones, such as patents and royalties. Those may not always be tariffed, Desmond said. At the same time, they are stockpiling inventory in the U.S.

In the long term, major pharmaceutical companies are looking to shift more production to the U.S. Recently, Eli Lilly and Johnson & Johnson announced plans to invest more than $80 billion in U.S. manufacturing and R&D over the next four to five years.

These large-scale projects take time, so companies aren't likely to downsize overseas plants anytime soon. But with the growing risk of changes to tariffs and the tax code, companies are taking reshoring seriously -- especially for newer, high-margin products.

The upshot is that profitability will be affected either way: Overseas goods may incur tariffs, while domestic manufacturing faces higher labor costs.

The Irish tax playbook may also be affected by continuing discussions to revamp parts of the U.S. tax code this year. In Republican proposals under discussion, policymakers are likely to consider a mix of carrots and sticks to make it more attractive to report profits in the U.S. -- and more costly to keep booking them in places like Ireland. Stricter U.S. tax policies compelling pharma to report more profits at home could reduce the industry's bottom line by about 5%, UBS estimates.

For years, pharma companies believed they had found the perfect loophole -- reaping massive profits in the U.S. while paying Irish tax rates. That may now backfire." [1]

1.  Tariffs Jeopardize Big Pharma's Tax Shelter --- The segment reaps most of its profits in the U.S. but shifts its tax burden to havens such as Ireland. Wainer, David.  Wall Street Journal, Eastern edition; New York, N.Y.. 03 Apr 2025: B10.