US ECONOMIC PACKAGE VIEWED

The Senate version of the economic package seems to be more drug industry-friendly than the House version, says Hemant Shah of HKS & Co, noting that under the latter, most drug companies operating in Puerto Rico would lose a significant portion of their tax advantages (Marketletter June 28).

His sources say that some House and Senate members are already preparing to lower tax benefits from the Senate version, but to a point still higher than the House version. The final reconciliation bill will probably cut tax benefits to either 50% of current income from Puerto Rico (further reduced by 5% per year to 25% by 1999) or 85% of total compensation to Puerto Rican employees plus depreciation (further reduced by 5% per year to 60% by 1999), he feels. Under any scenario, most drug firms will see their tax bills rise significantly from 1994, with an average rise in tax rates of between one and three percentage points, depending on the level of current benefits, particularly from intangible assets assigned to Puerto Rican subsidiaries. Under the Senate version, a firm with an effective tax rate of about 27% would see this rise by 1.5 percentage points, while under the House version the rise could be as much as three points.

A few firms have threatened to leave the island if current tax benefits are eliminated or much reduced. However, Mr Shah feels that regulatory difficulties and needed additional Food and Drug Administration approvals to change a manufacturing site means most companies will stay where they are. Further expansion could be delayed or taken elsewhere, though. Most drug companies may not be willing to make their key products for their US market in an overseas tax haven, he feels, fearing a disruption to supplies and/or delays in FDA approval of their plants.