Pharma Industry Weighs Where to Hold Its IP Amid Tariff Turmoil

President Donald Trump’s tariff policies are prompting large pharmaceutical companies to promise investments in US manufacturing, but it might let them keep the crown jewels—their intellectual property—overseas.

For imported goods, the value of these intangible assets is often embedded in the tariffed price, but companies that onshore manufacturing could avoid tariffs on the now-US-made goods while leaving the related IP abroad, where it can face lower tax rates or reap other benefits.

Big pharma firms have pledged billions of dollars in new US manufacturing plants since Trump’s global tariff proclamations this spring. Johnson & Johnson, for example, announced a $55 billion investment over the next four years, AstraZeneca $50 billion, and Bristol Myers Squibb $40 billion, according to a White House roundup.

The announcements typically haven’t mentioned what’s to become of the valuable IP behind the drugs set to be made in the US. Multinational businesses typically allocate IP ownership to a particular unit or subsidiary.

Intangibles like IP make up the bulk of companies’ value. As of 2020, they constituted 90% of the market value of the S&P 500 index, according to an often-cited study by IP consultant Ocean Tomo—up from up from just 17% in 1975.

Tax practitioners say companies could keep these assets overseas in tax-advantaged jurisdictions like Ireland or the Netherlands. These countries and others offer incentives for companies to place their IP there—lower tax rates, tax deductions, and other benefits. Putting more IP in the US could mean losing those tax benefits and paying higher taxes on corporate profits.

Bloomberg Intelligence tax policy analyst Andrew Silverman said in a June report that the tax benefits in certain countries “continue to make it more advantageous to keep IP offshore, despite efforts to reshore other business activities.”

The months since have seen on-again off-again tariff announcements from the Trump administration and an EU trade deal promising to cap pharma tariffs at 15%—though it remains to be seen if Trump will stick to that.

Last week, Silverman said the incentives to keep IP offshore remain. “Move the manufacturing back and keep the IP abroad,” he said. “Still a good strategy!”

Christine Kachinsky, KPMG’s leader for US tax sectors and the life sciences industry, said she hasn’t seen a wave of pharma companies deciding to put more IP in the US, though companies are increasingly modeling out what that could look like.

“Most companies are not making drastic changes to their IP structures solely in response to tariffs or incentives,” she said in an email. “The costs and complexities of moving IP, combined with regulatory and operational hurdles (and long lead time required for pharmaceutical/biotech drug production), make such moves challenging.”

Profit Shifting

IP can provide opportunities to reduce tax bills. Companies in the pharma and tech spaces have particularly caught the attention of officials and auditors for this sort of planning.

A classic maneuver involves a company in a high-tax jurisdiction putting IP into a subsidiary in a low-tax jurisdiction. The company then pays the subsidiary royalties to use it, so more profits appear in the low-tax jurisdiction while the first company claims losses in the high-tax jurisdiction.

US Sen. Ron Wyden (D-Ore.) has been investigating pharma giants for years, accusing some firms of such tactics. Financial filings have shown some businesses reporting massive profits overseas even as most of their revenue comes from the US.

Companies caught in Wyden’s crosshairs have disputed any allegations of wrongdoing.

Companies frequently defend their structures, arguing that there are plenty of business reasons to keep IP overseas.

“In an industry assumed guilty even if proven innocent, outsiders rarely judge strategic decisions through the lens of reality,” Jefferies analyst Will Sevush said. “And the reality is that Pharma made rational arguments for IP domiciling and location of substantial transformation to regulatory bodies on the path to 2025.” Substantial transformation, under US trade rules, determines a good’s country of origin.

Before announcing his reciprocal tariffs in April, Trump excoriated the Irish prime minister over Ireland’s use of its tax code to attract US pharma business. The country’s low corporate tax rate is a draw, but so is its deduction for royalty payments made to Irish entities.

“A lot of that, I think, people interpreted as transfer pricing-related versus physical manufacturing,” Nick Shipley, Cronus Consulting founder, said on an episode of the Talking Tax podcast. “While there is physical manufacturing in Ireland, it’s not a giant country. They’re not actually manufacturing all the drugs in the world, so it was largely about transfer pricing.”

Since the tariffs ramped up, however, US policies and practices around transfer pricing have remained largely untouched, Shipley said.

Meanwhile, incentives offered to companies to locate IP in low-tax jurisdictions like Ireland remain strong.

Relocating existing IP can trigger exit taxes and other penalties, making it unlikely companies will move IP they already have overseas. Companies may, however, choose to put new IP in the US that in the past would have been destined for offshore.

Just for example, Sevush said, it’s unlikely that Merck would relocate to the US existing offshore IP for its blockbuster cancer drug Keytruda. But Merck “migrating new Keytruda presentation or Keytruda combination therapy IP back into the USA? More likely,” he said.

Sevush said many decisions are made for reasons outside of tax planning. At the start of the Covid-19 pandemic, for example, pharma companies began putting IP in the US to better control their supply chains and get drugs to market faster.

And overseas IP can come with the risk of tax agency audits if a company can’t show a clear business purpose for it being there beyond tax planning.

“You have to have the resources and capabilities related to maintaining and developing the IP,” Glen Marku, Grant Thornton transfer pricing principal, said. “Shifting IP—even in the US—conceptually, you can do it, but you may have to move resources and people and so on.”