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Executive Summary

PMA member firms' added U.S. tax payments due to the 1982 TEFRA revisions to section 936 amounted to at least $531 mil. in 1983 and 1984, according to the results of a survey of PMA companies doing business in Puerto Rico. The survey was submitted for the record to the House Ways & Means Cmte. by PMA President Gerald Mossinghoff during his testimony on section 936 on July 11. Mossinghoff told the cmte. in submitting the survey that "despite the fact that Treasury has yet to issue final regulations, for only 19 of 29 [members in Puerto Rico] who took part in the survey, the added tax burden because of TEFRA was $213 mil. in 1983 and $318 mil. in 1984 for a total for those two years, before the regulations are even issued, of $531 mil." The calculation of total additional taxes paid by PMA firms under TEFRA was intended to counter criticism that drug firms are sheltering an unreasonably high amount of profit under section 936. In the Administration proposal, the Treasury Dept. maintained that section 936 tax credits under TEFRA are increasing. Mossinghoff declared that "none of the calculations that are around take into account the fact that you do pay taxes on Puerto Rican operations." Reflecting the perception that section 936 companies pay no taxes on their Puerto Rican operations, Rep. Pickle (D-Tex.) said prior to Mossinghoff's testimony that "the fact is, these companies don't pay any taxes. They pay their employees, but profits are . . . tax free. Now that bothers a lot of us." Pickle added that "we want to help [the Puerto Rican] economy, but we also ought to have a better program. Now I don't know that a wage credit is a better proposal, but it seems to me like we ought to look at this question very closely." By far the most popular election method used by the PMA firms responding to the Arthur Anderson survey was the profit split option. According to Arthur Anderson, $150 mil. in taxes in 1983, and $196 mil. in 1984, was paid under the profit split method. For 1983, $46 mil. in taxes was paid under the cost sharing option, while in 1984 $104 mil. was attributable to cost sharing. "Mixed and other" methods accounted for $17 mil. and $18 mil. in 1983 and 1984, respectively. The PMA president said that "the Treasury proposal would not generate significant additional tax revenue during the five year transitional period; none, in fact, before 1989. Indeed, careful studies show that little if any new revenues would result even following this period. Thus, the very real costs of the Treasury proposal would completely outweigh any benefit." In his prepared statement, Generic Pharmaceutical Industry Assn. Chairman William Haddad said that the Treasury Dept.'s proposal is "premised on the allegation that TEFRA is not working." While he said that Treasury has "yet to provide believable documentation for that view," Haddad said that even if it is accurate the proper solution is to revise the TEFRA changes. Haddad, appearing on the same panel with Mossinghoff and concurring with PMA's opposition to revisions to section 936, told the cmte. that "you have remedies to correct that situation. With technical and even substantive amendments you can make TEFRA work to your will. If TEFRA is not working, have Treasury suggest ways to make it work. If you adopt their drastic solution, you are throwing out the baby with the bath." As another reason for retaining section 936, Haddad -- who is also Vice Chairman and CEO of Danbury Pharmacal -- said that "I assume Congress will pass the minimum corporate tax. It is needed. My company paid half its profits in taxes last year. We don't like to see the multinationals shelter their responsibilities. That's unfair competition. With that minimum tax, to paraphrase the President, you will have a safety net to prevent abuses of 936."

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