Eli Lilly and the Insanity of Foreign Taxes

I’m going through the corporate bond filings of pharmaceutical giant Eli Lilly just out of curiosity.  They have a huge patent cliff coming up, during which time as much as 40% of their revenue base will be exposed to generic competition.  I wondered what it would do to the risk metrics on the senior bonds so I pulled the Moody’s rating and reading over the figures as I listen to an old 1970s song called Snookeroo.

Side note: The song is interesting.  After the breakup of The Beatles, Ringo Starr wanted the biggest pop giant of the day, Elton John, to write a song for his new solo album.  Starr famously told John to make it, “nice and commercial”, so Bernie Taupin, long-time lyricist responsible for hits like Tiny Dancer, Your Song, and Bennie and the Jets, sat down and wrote out a short biographical poem about Starr’s life.  Elton went to the piano and hammered out a tune, recording this demo:

Then Ringo took it and recorded it his way, with full production values, so that it turned out like this on his album:

The song became the “B Side” of the #3 hit “No No Song” here in the United States.

Anyway, Eli Lilly demonstrates the bizarre taxation policy of the United States.  The firm has billions of dollars in cash in foreign subsidiaries that could be brought back to the United States, to create jobs here, pay dividends here, make acquisitions here, launch new plants here.  Unfortunately, the moment that money touches American shores, it’s subject to full corporate taxation, meaning the government will take more than 1/3rd simply for bringing the money back to the USA and investing it here instead of in, say, China or Germany.  We’re literally incentivizing, by huge sums, building other nations.  Hiring non-American workers.  It’s crazy.

This is a company in Indiana that can’t bring home its profits unless it wants to be punished.  The last time there was a repatriation holiday, waiving the taxes that would due in order to encourage giant corporations to bring money home to the United States, at least 55% of the total money brought back was paid out in the form of increased dividends [PDF].  That’s a lot of extra money sloshing around the U.S. economy instead of sitting in a bank in Switzerland.