Pfizer (PFE) Can Dodge $35 Billion in Taxes But Only if It Gives Up Its U.S. Citizenship
2/26/2016 6:43:36 AM
February 26, 2016
By Mark Terry, BioSpace.com Breaking News Staff
As U.S. regulators evaluate the pending Pfizer (PFE) merger with Ireland-based Allergan (AGN), a report by an advocacy group called Americans for Tax Fairness (ATF) promises to add fuel to the public fire over tax inversion deals and drug pricing.
It’s no secret that New York-based Pfizer was interested in a tax inversion deal. By merging with Allergan and shifting its corporate domicile to Ireland, the company’s corporate tax rate will drop from 35 percent in the U.S. to 12.5 percent in Ireland.
The report published yesterday by ATF estimates that Pfizer will avoid paying about $35 billion in taxes as the result of the merger. It is based on a Pfizer disclosure that in 2014, it “had a deferred tax liability of $21.2 billion on unrepatriated foreign earnings,” reported the International Business Times. In addition, Pfizer has approximately $74 billion in overseas earnings that it doesn’t intend to bring back to the U.S.
That probably shouldn’t be a surprise either. It’s been noted by analysts before that a chief executive officer that would intentionally hand over $30 million or so dollars that he or she didn’t have to, would likely be ousted quickly by shareholders.
The ATF comes down pretty hard in its report. “By dodging taxes while boosting prescription drug prices, Pfizer squeezes American families and communities from two sides at once,” wrote ATF’s executive director, Frank Clemente, in a statement with the report. “If Pfizer wants to be an Irish company to cut its taxes but still be based in America, then it should charge American patients the same much lower drug prices it charges Irish consumers. Pfizer charges 12 times as much, on average, on this side of the Atlantic under the Medicare program for the same seven top-selling drugs as it charges in Ireland.”
Various tax experts, however, indicate that the ATF is putting some spin on its interpretation of the numbers. Robert Willens, a tax and accounting consultant in New York, told The Sydney Morning Herald that the $35 billion figure was “probably a little misleading.” The reason for his statement is that it was extremely unlikely that Pfizer would bring the $74 billion in offshore earnings to the U.S. They would find some other way of utilizing it. “They haven’t given up the ghost there.”
Part of the rationale for the merger was Pfizer’s ability to access the $140 billion in foreign earnings tax-free for loans among its various affiliate companies. “That’s 100 percent the reason behind this deal,” Willens said.
In 2004, the U.S. government granted companies a one-time repatriation holiday that allowed them to bring foreign earnings back into the country at a tax rate of 5.25 percent. At that time, Pfizer brought $35.5 billion back.
Jennifer Bloun, an accounting and tax professor at the Wharton School of Business at the University of Pennsylvania, told The Sydney Morning Herald that the amount of U.S. taxes Pfizer might avoid is probably not that clear cut, and will depend how much the U.S. government will allow companies to repatriate in the future and at what rate. This is a topic both parties, Democrats and Republicans, have discussed. “It’s quite misleading to imply there’s a $35 billion revenue loss,” Blouin said. “ATF thinks that in the absence of the Allergan transaction that $35 billion will be coming to the Treasury. Nope, not going to happen.”
Earlier in the week, Rep. Sander Levin of Michigan (D) and Rep. Chris Van Hollen of Maryland (D), proposed legislation that addresses “earnings stripping,” one of the biggest benefits of tax inversion deals. While a tax inversion lowers the tax rate, as The Washington Post reports, “a company involved in an inversion can often offset taxes with the interest from debt payments made by its U.S. operations to its foreign parent company.”
In a statement, Levin said that earnings stripping “enables them to significantly lower the amount of taxes they pay in the U.S., while taking advantage of our country’s resources and strong workforce.”
The Treasury Department is reviewing this issue. A spokesperson for the Treasury Department made a statement, saying, “The administration will continue to explore ways to address inversion—including potential guidance on earnings stripping—but the only way to fully solve this problem is for Congress to enact legislation that specifically addresses inversions.”
It’s questionable whether Congress can agree on any major legislation involving corporate tax rates, even if it weren’t an election year. Some politicians want to push the issue off on the Treasury Department rather than write laws about it.
Rep. Lloyd Doggett of Texas (D) and eight other lawmakers wrote a letter yesterday to Treasury Secretary Jack Lew yesterday, stating, “Prior Treasury guidance has not been successful in slowing inversions and no meaningful legislative response seems probable this year from Congress. We simply cannot wait, and your action can put a stop to this trend until a new Congress can act.”
In other words, the U.S. Treasury Department says it’s Congress’s problem, and Congress says it’s Treasury’s problem.
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