May 13, 2010 -- As America struggles with record deficits, tax dodgers apparently are taking billions of dollars out of the country.
Thirty million prescriptions were filed last year for the anti-depressant Lexapro, made by the U.S. pharmaceutical company Forest Labs. According to a story in Friday's Bloomberg Businessweek, most of the profits from that drug were transferred overseas, thus avoiding having to pay taxes in the United States.
The news is shocking to Lexapro customers like Tyler Hurst, who buys the drug at a Phoenix pharmacy.
"It does not say, 'The profits of this go outside the country,' anywhere," said Hurst as he looked at the drug bottle. "It is shady."
Companies Engage in 'Transfer Pricing'
It may seem shady to Hurst, but hundreds of U.S.-based multi-national companies engage in the legal practice known as "transfer pricing."
"The most recent estimate for how much tax revenue gets lost in the U.S. is $60 billion a year," said Bloomberg reporter Jesse Drucker. "But there are some reasons to believe those estimates are conservative."
The figure, $60 billion, is more than the budget for the entire Department of Homeland Security.
"We are obviously now in a time of enormous deficits, and we should be broadening our tax base," said tax economist Martin Sullivan. "This phenomenon is moving exactly in the opposite direction."
Following the Paper Trail
So, how does it work? Bloomberg traced the dots, starting with Tyler Hurst in Phoenix, following a contorted paper trail with the profits ending up in Forest Labs' Bermuda subsidiary, a facility that consists of a secretary in a law office.
The U.S. corporate tax rate is 35 percent, while Bermuda has no corporate tax.
Last year, sales of Lexapro generated more than $2 billion in revenue.
"It's a nearly 100 percent American company in terms of where it does its sales," said Drucker. "Yet the majority of their profits show up overseas."
Sen. Carl Levin, D-Michigan, has called transfer pricing, "the corporate equivalent to secret offshore accounts of individual tax dodgers." But legislation to tighten the laws that allow it has never gotten very far, as the efforts have been fought by corporate lobbyists.
Forest Labs declined to respond to this report.