After more than 160 years, America’s second-largest drug company is moving out — and taking tens of billions in unpaid tax dollars with it, forever. Pfizer will merge with Dublin-based Allergan and relocate its executive offices to Ireland to minimize its U.S. tax liabilities, the companies announced Monday.
The deal consummates Pfizer’s longstanding ambition to avoid American taxes through a specialized corporate marriage called an “inversion.” The Viagra manufacturer came close to striking a similar deal with the British firm AstraZeneca back in the spring of 2014 but the parties never settled on mutually agreeable terms.
Monday’s announcement positions Pfizer to start paying an even lower tax bill than it currently achieves through creative accounting. On paper, the firm has been paying about a 24 percent tax rate over the past four years.
But that’s a fiction, according to an analysis by Americans for Tax Fairness. Actual payouts for taxes amounted to just 6.4 percent of the company’s income over the same window. The discrepancy comes from accounting measures that hold offshore profits in reserve against potential future tax bills should the company repatriate hundreds of billions of dollars held abroad to the U.S., which it was unlikely to ever do even before agreeing to change its tax address to Dublin.
The inversion will bring the company’s nominal tax rate down below 18 percent once Pfizer and Allergan formally combine, which will reportedly take about a year. Its real tax rate will likely fall commensurately as well. The company is reportedly considering splitting the merged firm into two businesses in the coming years, in order to separate drugs that are still protected by patents from those that have to compete with generic alternatives of the same medicines.
Corporate interests depict inversions as a rational response to the U.S.’s high nominal tax rate for corporate income of 35 percent. If American lawmakers lowered that rate dramatically and allowed U.S.-based firms with huge stashes of offshore cash to bring that money home without having to pay full tax rates on those profits, the companies argue, inversions wouldn’t be so enticing to multi-billion-dollar companies.
But the last time the U.S. created such a tax repatriation holiday, companies used the windfall to feather executives’ nests rather than investing in job creation at home. Indeed, several of those companies laid off tens of thousands of workers during the holiday. Out of every dollar that companies shifted back to the U.S. during the holiday, 92 cents went to shareholders or executives.
In general, companies that fixate on minimizing their tax liability contribute far less to real economic growth and job creation than those that don’t spend as much time on accounting gimmicks. The Fortune 500 companies with the highest tax rates from 2008 to 2010 added about 200,000 jobs on net from 2008 to 2012, while the firms that achieved the lowest tax rates laid off a net 51,289 people in the same window. The divergence there is between companies that are looking to manufacture healthy financial reports for shareholders and those that are actually growing their business’s production capacity and customer base. The same corporate mentality that spawns that economically harmful short-term bent in boardrooms is also costing the country tens of billions of dollars in tax revenue each year — more than enough to fund policies like universal pre-school that have seemed politically impossible during the debt fervor of the past five years.
Inversions are the most dramatic of the tactics that companies use to massage their tax bill. But on the practical level of people doing jobs and selling goods, very little actually changes for companies that invert. Their physical infrastructure remains where it is, their goods still exchange on public roads, and their stock continues to trade on American exchanges. All that changes is the mailing address.
At about $160 billion, Pfizer’s inversion deal will be the largest ever. A wave of smaller inversions over the past couple years moved companies like Burger King, Chiquita, Medtronic, and a host of less well-known firms outside the U.S for tax purposes. The Wall Street advisers that help shepherd such deals to completion have raked in about a billion dollars in fees from such mergers in recent years. The pattern drew the ire of members of Congress and the Obama White House, which has tried to curb the mergers through executive action.
Monday’s deal underscores the limitations of such a non-legislative crackdown, and may prompt a renewed push to overhaul the corporate tax code entirely. Any such reform campaign would aim to encourage companies with giant annual profits to stop hiding the bulk of their cash and start returning greater revenue to the public. But the risk remains that lawmakers around the world will respond to corporate creativity about moving revenue around between tax havens like Ireland and the Cayman Islands by engaging in a race to the bottom on corporate rates rather than by creating the kind of robust, simplified tax code that would discourage accounting workarounds.