Pfizer-Allergan Deal

Leaving Home and Tax Obligations Behind

A company logo is seen through branches at a Pfizer office in Dublin, Ireland November 24, 2015. Pfizer Inc said on November 23 it would buy Botox maker Allergan Plc in a deal worth $160 billion to slash its U.S. tax bill, rekindling a fierce political debate over the financial maneuver. REUTERS/Cathal McNaughton
A Pfizer office in Dublin.
  • Why it matters

    Why it matters

    A G20 plan aims to stop tax-avoidance schemes, but it’s an open question which nations will enforce it.

  • Facts

    Facts

    • The Pfizer-Allergan deal is expected to save Pfizer billions in tax payments annually.
    • Ireland’s corporate tax rate is 12.5 percent. In the U.S., Pfizer faces a rate of 35 percent.
    • The heads of the world’s 20 largest industrialized nations agreed to new regulations about such tax-sweetening deals a week ago.
    •  
  • Audio

    Audio

  • Pdf

One thing that’s needed in finance ministers’ international fight against excessive tax evasion by corporations is a lot of patience. The wait for legislative action can seem endless.

Many initiatives launched since the 1980s, most of them coordinated by the Organisation for Economic Co-operation and Development, lost their momentum.

The global financial crisis finally made the G20, the group of the 20 largest industrialized and emerging countries, agree to new regulations. As of 2017, the Base Erosion and Profit Shifting (BEPS) plan aims to stop tax-avoidance schemes that allowed company profits to be shifted across borders and prevent home nations from getting their proper tax payments.

A week ago, G20 heads of states and governments agreed to the BEPS plan. Since then, discussions have been dominated by the question of which countries will actually enforce the new regulations. In Germany, members of the lower house of parliament, the Bundestag, are hearing from corporations that in the end the nation’s authorities might have to sacrifice tax payments at the expense of other countries.

With this background, perhaps one of the most effective incentives for all G20 governments to continue the fight was the just-announced buyout by the U.S. pharmaceutical giant Pfizer of the considerably smaller Irish firm, Allergan.

In a world in which the U.S. no longer sets the rules of globalization, the advantage turns into a disadvantage.

The deal was so obviously launched by a drive to save on taxes that even the opposing U.S. presidential candidates Hillary Clinton, a Democrat, and Donald Trump, a Republican, both called for rules that would allow such tax strategies to be changed. The new pharmaceutical corporation would be paying its taxes in its new corporate headquarters in Ireland, although the company’s important research and production sites would remain in the United States.

The international BEPS regulations address such so-called inversion strategies. The guiding principle in the fight against tax evasion is that taxes are to be paid where the value creation takes place. The exploitation of tax rules abroad for the purpose of reducing taxes is banned.

The Pfizer-Allergan deal is expected to save Pfizer billions in tax payments annually. Ireland’s corporate tax rate is 12.5 percent. In the United States, Pfizer faces a rate of 35 percent. Chances are growing that the U.S. will follow the BEPS philosophy of creating fair tax competition worldwide.

U.S. rules are the root of most of the excessive tax structures. American corporations pay no taxes on foreign income as long as it is earned outside the United States. It used to be the case that this served the political aims of easing expansion into foreign countries for U.S. companies. But in a world in which the U.S. no longer sets the rules of globalization, the advantage turns into a disadvantage. Starbucks, Google, Apple, Amazon and GE are more than showing the way.

Such firms hoard billions in foreign income outside the United States, preferably in tax havens, and the companies are likely to buy back stocks or go on sprees to buy companies at inflated prices rather than invest the money in the United States and pay taxes on it. According to this principle, only corporations whose U.S. shareholders own less than 60 percent of the company are allowed to move their corporate headquarters abroad – as Pfizer is planning.

Just as the European Union governments did in the 1990s and 2000s, the United States urgently needs corporate tax changes that will result in lower rates domestically – and do away with foreign profit privileges. The international BEPS regulations should then be endorsed by the Republican-led U.S. Congress and the Obama administration. BEPS has already forced Ireland to abolish its most excessive tax-saving models and to take part in the E.U. battle against the most severe tax tricks.

Internationally, fair corporate-tax rules ultimately benefit not only the individual governments but also many companies. National players will be freed of the unfair part of the competition between multinational corporations. And corporate heads will think more about a merger without tax advantages and what sense a mega-deal makes in the long term before they pay an astronomical price.

Allergan’s purchase price amounted to about twice its actual industry value. The fact that U.S. taxpayers are financing such an exorbitant profit for Allergan shareholders is not fair from any point of view.

 

To contact the author: riedel@handelsblatt.com 

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!