November 30, 2015
By Mark Terry, BioSpace.com Breaking News Staff
Now that the Pfizer -Allergan merger is mostly official, analysts, politicians and journalists are taking a crack at what it all means. For the most part, what it all means comes down to a discussion of U.S. corporate taxes, what responsibilities a chief executive of a publicly-traded company has to shareholders, and what—if anything—it means to be a good corporate citizen.
As by now everyone probably knows, New York-based Pfizer Inc. (PFE) and Dublin, Ireland-based Allergan plc (AGN) are merging in a deal with a total enterprise value of about $160 billion. To no one’s surprise, since Pfizer’s chief executive, Ian Read, has been very public about this, a major reason for the merger is a tax inversion. A tax inversion is when a U.S.-based company acquires a company based in a country with a lower corporate tax rate and shifts its tax domicile to that country.
The U.S. Treasury Department has made a few rule changes to discourage those tax inversions, but real changes would require an act of Congress. Besides which, in the case of the Pfizer-Allergan deal, it was structured in such a way that from a paperwork point of view will appear as if Allergan was taking over Pfizer, rather than the other way around. This is a blatant dodge of U.S. tax regulations.
As Holman Jenkins writes for The Wall Street Journal, a publication clearly in favor of lower corporate taxes and decreased regulation, “Even more pressing for Pfizer, as for many U.S. companies, are its large deferred profits piling up overseas to avoid the U.S. tax code. In Pfizer’s case, the total is $144 billion—which, if brought home, would be subject to an estimated tax hit of $42 billion, the equivalent of nearly a quarter of the company’s market cap.”
Whenever a large U.S. company is involved in a tax inversion deal, whether it’s Pfizer or Medtronic, Inc. or Burger King, politicians are quick to condemn the action, often labeling it as “unpatriotic.” Election year politics tend to heat up the rhetoric, with John Kerry, when running unsuccessfully for president in 2004, dubbing the phrase “Benedict Arnold CEO.”
It’s probably worth noting that since 1982, only about 51 U.S. companies have done inversion deals, although more than 20 of those occurred since 2012. The White House and Congress—pretty much no matter which party is in charge—have vowed to end the practice, but neither branch of government appears to feel all that strongly about it because the measures against it are tepid at best.
In 2004, Congress enacted a one-year tax holiday so U.S. companies could bring their foreign earnings back home at a tax rate of 5.25 percent, but aside from that, not much of significance has been done. But as Jenkins points out, any chief executive who intentionally took a $42 billion tax bite, wouldn’t be acting in good faith for the company’s shareholders. “Indeed,” he wrote, “it would be indefensible.”
And it does seem likely that a draconian crackdown on merger-and-acquisition activity in general would have a significant negative effect on the U.S. economy. There’s been over $600 billion of mergers and acquisitions in the U.S. biopharma industry—counting the Pfizer-Allergan deal—this year alone.
On the other hand, what is to be done when a U.S. company, which has benefited from corporate tax breaks on a local, regional and state level, which has benefited from U.S. infrastructure, decides to basically change its tax location—but generally not its operations or practical headquarters—to a different country precisely to avoid taxes?
Drug companies make this a little more complicated than other industries for a variety of reasons. Certainly this year’s furor over drug pricing, spiked by Turing Pharmaceuticals LLC’s 5,000 percent increase of toxoplasmosis drug Daraprim and Quebec-based Valeant Pharmaceuticals International Inc. ‘s increase of Nitropress and Isuprel by 212 percent and 525 percent, respectively, is a factor. Since some drugs range upwards of $85,000 to $225,000 per regimen, and those companies expect insurance companies and Medicare and Medicaid—essentially tax payers and government—to foot the bill, it’s a little disingenuous to argue that the government has no right to push for higher taxes.
Still, the U.S. corporate tax structure has its problems. Pro-corporate publications, such as The New York Post, argue, “How are American companies supposed to compete on a global stage when hamstrung by the highest corporate tax rate in the developed world?”
And an issue that doesn’t get discussed much is how to balance out the taxation issue. Countries with lower corporate taxes don’t necessarily have low personal tax rates. Although the topic of taxation is enormously complicated, the Organisation for Economic Co-operation and Development (OECD) points out that when looking at income and social taxes of individuals making $100,000 and $300,000 annually, in a comparison of 114 countries, the U.S. ranks 55 for the $100,000/year group and 53 for the $300,000/year group. In other words, our corporate tax rates may be high, but our personal tax rates are relatively low. It’s doubtful if most people would want those reversed. Or what services they would give up to have lower corporate and personal tax rates.
