With Pfizer deal, inversions are back

Pfizer, one of the world’s largest pharmaceutical companies, announced Thursday that it was in “preliminary friendly discussions” with pharmaceutical company Allergan about combining to form the world’s largest drug company.

If the deal goes through, the headquarters of the combined company could be placed in Dublin, home to Allergan, rather than New York, where Pfizer is headquartered. That move would allow the newly formed business to take advantage of Ireland’s lower corporate tax rates.

The threat of Pfizer moving its headquarters outside the U.S. would realize the fears of lawmakers such as newly installed House Speaker Paul Ryan, who has sought to reform the corporate tax code. It also has drawn the ire of Democratic lawmakers who view such tax maneuvers as corporate disloyalty.

In short, it means that the phenomenon of corporate inversions is intruding into Washington politics and the 2016 election.

Despite the lost revenue and outrage, however, there is not likely to be any more of a response than there was last year, when Burger King moved its headquarters to Canada in a merger with Tim Hortons.

Pfizer CEO Ian Read acknowledged Thursday at an event with the Wall Street Journal that the push for the deal was driven largely by tax considerations.

“I feel we’re at a tremendous disadvantage right now in that race,” he said. “I have foreign companies who have tax rates of 15 percent who can invest $2 to $3 billion more in research than we can, and we’re fighting with one hand tied behind our back.”

Companies such as Pfizer are prohibited by U.S. law from simply setting up a mailbox in a tax haven like the Cayman Islands and calling it their headquarters. But they can get around those restrictions through mergers with companies of sufficient size, a tax trick that has become increasingly popular in recent years as other countries have modernized their tax codes and lowered corporate taxes.

It would not be the first time that Pfizer has tried to buy a company in a low-tax jurisdiction. But it would be the first attempt since the Treasury Department announced rules to undercut the benefits of inversions a year ago, at the height of fears that companies would head for the exits in large numbers.

Some of the key Democrats who have proposed laws to stop such tax-driven deals renewed their calls for legislation Thursday.

“Congress must realize that while the administration’s actions to curb tax inversions have had some impact, as companies continue to contemplate possible tax inversions, it is our responsibility to act to address this loophole once and for all,” said Sander Levin, D-Mich. Levin, with his brother Sen. Carl Levin of Michigan, was one of the top Democrats who had pushed last year to tighten tax law relating to inversions. Carl Levin retired at the end of the year, before Republicans gained control of the Senate.

Republicans are generally less supportive of measures to block companies from making deals to lower their taxes by moving outside the country.

Instead, Republicans have sought to lower corporate tax rates or otherwise remove the incentives for companies to move out of the U.S. A plan backed by Ryan, when he was chairman of the Ways and Means and Committee, would have ended the U.S. practice of taxing companies on all their worldwide income at the 35 percent statutory tax rate, the highest among advanced economies. It also would have placed a special, low one-time tax on the cash that U.S. corporations have stashed overseas to avoid taxation, estimated at more than $2 trillion.

Accessing that cash is one of the main reasons companies would seek to combine with businesses in low-tax countries, said Steven Rosenthal, a tax expert at the Tax Policy Center in Washington.

With it becoming apparent that a deal like Ryan’s or another plan to allow repatriation of funds at low rates was unlikely, companies instead may be looking to merge with overseas companies or seek foreign takeovers, Rosenthal said. “I think there was some hope that in the context of ‘tax reform’ there would be a holiday … it looks less and less likely.”

The other reason for companies to seek the deals is that they can take advantage of the lower tax rates in foreign companies by shifting income from the U.S. to the other country.

In the case of Pfizer, it reported an effective tax rate of about 25 percent in its most recent filing. Allergan’s is reported to be significantly lower, thanks in part to Ireland’s 12.5 percent statutory corporate tax rate, the lowest of developed countries.

Just how many companies might respond to those incentives is a matter of guesswork.

Carl Icahn, the activist investor who has announced a $150 million super PAC to back legislation reforming international taxation, reacted to the news about Pfizer Thursday on Twitter. “Today Pfizer confirmed they are planning to move out of the country,” the billionaire wrote. “The situation is much more dangerous than most people believe.”

Meanwhile, even if action isn’t taken, Democrats likely will try to spin the flight of corporations to their benefit.

Hillary Clinton, the Democratic frontrunner for president, “is committed to cracking down on so-called ‘inversions,” a spokesman told Bloomberg Thursday.

“The continued pursuit of inversions, mergers and foreign acquisitions of major U.S. companies for purely tax purposes shows there is a lot more work to be done to stop them,” said Sen. Chuck Schumer, D-N.Y., the likely next Senate Democratic leader. “The Treasury Department’s efforts certainly helped stem the tide of inversions, but it will take legislation to effectively combat this disturbing trend.”