Saturday, November 28, 2015


Pfizer and Tax Inversions


In a $160 billion deal, Pfizer has agreed to merge with Allergen, an Irish drug company in a tax inversion, defined as a transaction used by a company whereby it becomes a subsidiary of a new parent company in another country for the purpose of falling under more beneficial tax laws.

In the case of Pfizer, the new merger would reduce its tax burden from 25% to 17%-18%,

This is a good deal for Pfizer and its stakeholders. President Obama says the transaction is “unpatriotic” because it deprives the U.S. government of revenues and transfers job abroad.

The U.S. at 35%, has the highest corporate tax rate in the developed world. Ireland, at 12.5% has one of the lowest rates. For this and other reasons, more than 47 companies have moved their headquarters abroad in the last decade with more to come. Medtronic and Walgreens are considering a similar move.

Ireland, with its English-speaking populace, and its experience in serving as headquarters with other drug companies is a logical place to go. Pfizer makes 60% of its profits overseas, and Ireland is a good place to park those profits until the U.S. lowers its corporate tax to Pfizer can compete with other global companies with foreign headquarters such as GlaxoSmithKlne, AstroZeneca, and Novartis.

Pfizer, to please its stakeholders, does not want to be double-taxed by the host country and the U.S., so it parks $74 billion abroad.

So why doesn’t the Obama administration lower its corporate tax to bring workers and cash back home? I suspect the reason is mainly ideological. The administration is no friend of corporate America. Nor is his possible successor. Hillary Clinton, who hopes to succeed Obama, says, “ We cannot delay in cracking down on inversions that erode our tax base.”

But does a high corporate tax rate erode the U.S. tax base? Experience indicates lowering tax rates, particularly capital gains, always increases government revenues. Lowering corporate rates would likely have the same effect.

Arthur Laffer, of Laffer Curve fame, has shown that when taxes reach a certain level, federal tax revenues fall. Pfizer’s move to merge indicates that a 35% corporate income tax has reached that level.

Pfizer CEO, Ian Read, has been travelling to Washington for two years, trying to convince Obama, his acolytes, and Congress and everybody who would listen that the corporate income tax rates was too high. Read claims because of U.S, tax code, Pfizer can invest only 65 cents on the dollar of overseas profits.

Pfizer’s solution?

Lower the corporate tax to be competitive with Pfizer’s drug rivals, or Pfizer will move to Ireland to merge with Allergen and to become the world’s largest drug company with revenues of $322 billion. Corporate America’s first obligation is to satisfy its stakeholders by promoting growth and profits, not to enrich the U.S. treasury or its overreaching bureaucracy.

The obvious solutions to preventing further tax inversions are to reduce the corporate tax, to simplify the tax code, and to stop punishing companies for investing in the U.S.

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