Recently, new rules have come into effect in San Diego, with the goal of deterring corporate tax-saving “inversions.” An inversion is a way for companies to shift earnings and profits to foreign markets, thus lowering U.S. tax obligations. The question is, will those new rules hurt the biotech research sector in San Diego?

Most experts say no, though there are a few that believe it will hurt the biotech sector.

Some believe that the new treasury rules are simply aiming to penalizing companies that are attempting to shift earnings to low-tax countries. This ensures that companies will continue to use tax avoidance strategies as influences to business decisions, which will make U.S. companies operating globally to not be as competitive as they could be, as well as not attracting as much investment as they could be.

Another viewpoint that believes the new rules will negatively impact biotech companies say that even if the biotech companies don’t currently use inversion tactics, the Treasury Department’s rules will reduce the potential value of inversions, leaving companies less profitable in the long run. This could make the biotech and pharmaceutical companies less competitive than similar companies in foreign settings.

However, many people do not believe the new rules will make a major impact. The biggest reason cited is that many of the San Diego biotech companies are more focused on research, product development and drug trials, as opposed to product sales and income growth. As a result, much of the work done by

San Diego biotech companies is pre-revenue, making the need for inversion much smaller, meaning that there is no significant impact to the biotech companies in the area. These types of accounting tactics are typically made my very large drug companies, which does not necessarily fit the profile of most of San Diego’s biotech firms.

Other experts say that even if these new rules hurt local biotech companies, it is still good for San Diego as a whole. Corporate tax inversions typically come from a large company buying a small foreign company and then moving the headquarters overseas to reduce U.S. tax burdens. This can be seen as an exploitation of the tax codes, which hurts the local economy and local governments. Thus, even if it did hurt the San Diego biotech companies’ bottom’s lines a bit, it would still be a net positive for the economy as a whole.

Photo Credit: Umberto Salvagnin