A Tax-Cutting Move That Pfizer Can Hardly Resist

November 18, 2015


Give Pfizer, the giant drug maker, points for boldness and persistence: The company has bravely put “tax inversions” back in the headlines.

[ by Jeff Sommer | November 14, 2015 | NY Times ]

Pfizer, which already holds roughly $140 billion overseas and is quite skillful at minimizing its taxes, is considering a deal that could move its legal tax headquarters from New York to Dublin, where it could save bundles more.

This has drawn plenty of criticism, naturally. Last week, Americans for Tax Fairness, an advocacy organization affiliated with labor unions, issued a report accusing Pfizer of a pattern of global “tax dodging.” Meanwhile, presidential candidates and members of Congress have repeatedly condemned inversions and the Treasury Department said it was studying ways to further tighten rules that discourage them.

o Britain. That failed attempt led to the introduction of legislation that went nowhere in Congress, but there was heavy political fallout. President Obama called inversions an “unpatriotic tax loophole” that needed to be closed, if only a divided Congress could agree on a way to close it. More than a year later, however, Congress remains divided, and that loophole is still open.

The core problem is that, from a purely financial viewpoint, tax inversions make sense for companies like Pfizer. While rarely, if ever, paid in full, the 35 percent statutory corporate tax rate in the United States is higher than in other countries. Most important, the United States taxes the worldwide income of its domestic companies, while many major countries do not. Even though there are ways around that requirement, it is tempting for American companies to move their tax homes elsewhere.

Edward Kleinbard, former chief of staff of the congressional Joint Committee on Taxation, says the American tax code should be revamped so that inversions are no longer sensible. But that change won’t happen overnight. “I’m hoping that Congress imposes a two-year timeout on tax inversions,” he said. “If Congress doesn’t act, tax inversions will be very appealing for many American corporations.”

They still appeal to Pfizer. Last month, the company revealed that it was engaged in merger talks with Allergan, a smaller pharmaceutical company that operates in New Jersey but has already shifted its own tax domicile to Ireland through a tax-inversion merger.

Pfizer says it is seeking new drugs and synergies in a possible merger and not just tax shelters. But when Ian C. Read, Pfizer’s chief executive, was asked in a conference call on Oct. 27 why he was willing to set off another political furor with an attempt at an inversion, he discussed the tax issues. “The shareholders of Pfizer expect us to maximize the return, and the employees of Pfizer want to have a robust, successful company in the future,” he said. “To be successful in the future, we need to have a competitive tax rate.”

Mr. Read is an accountant, and Pfizer represents a textbook case of complex global accounting. What is fascinating about the company’s accounting achievements — if you can conceive of accounting as fascinating — is that Pfizer has been deftly exploiting tax anomalies for years, yet it is evidently convinced that it can do even better with a foreign tax address.

As a matter of fact, Pfizer’s adroit tax accounting is featured in a textbook — “Financial Accounting: An Introduction to Concepts, Methods and Uses,” now in its 14th edition. Roman L. Weil, professor emeritus at the University of Chicago Booth School of Business, is one of the book’s authors. He said he had chosen Pfizer because its work was both elaborate and “unexceptionable.”

“It illustrates a phenomenon common to large, multinational U.S. corporations,” he said. Much of their revenue is earned and taxed abroad — and companies have considerable leeway in allocating that revenue and costs to cut taxes. When multinationals based in the United States want to “bring those after-tax dollars home, they will have to pay further taxes to the U.S., maybe 25 percent of every dollar. It’s not surprising that companies like Pfizer and G.E. want to keep those dollars abroad so they don’t have to pay those taxes.”

This isn’t an easy subject. Pfizer says its “effective tax rate” for 2015 is about 25 percent, not 35 percent. But if you’re not an accountant, that phrase, “effective tax rate,” may not mean what you think it does. It’s not what the company actually pays. Rather, it is what the company would ultimately be obligated to pay, after factoring in credits for payments to other governments and other issues and assuming it repatriates a certain amount of foreign earnings. When, if ever, Pfizer would pay enough to reach 25 percent is far from clear.

Pfizer’s accounts show that it has sheltered $74 billion by holding it overseas and declaring that the money will remain abroad “indefinitely.” While the United States government taxes companies on their worldwide income, it doesn’t collect the tax on earnings that remain abroad. (Pfizer might be able to use its overseas cash in a merger with a foreign-domiciled company, like Allergan. That could enable Pfizer to declare itself an Irish corporation, easing its tax problems.)

On top of that $74 billion, Pfizer keeps an additional, unspecified amount abroad that it says it does intend to repatriate, so it makes a “provision for taxes on income” for that sum. A note in its 2014 financial statement also says it has accrued a total of $21 billion in “deferred tax liabilities” over many years. That implies that it’s holding a big chunk of cash overseas that it expects to bring home one day. How much, exactly? Based on information in Pfizer’s financial statements, I calculated that this second stash also amounts to more than $70 billion. I sent Pfizer my calculations.

“Although I can’t provide you with an exact dollar amount, your assumption about grossing up the $21 billion is correct,” Joan Campion, a Pfizer spokeswoman, said in an email. In other words, Pfizer keeps $74 billion abroad “indefinitely” and a further $70 billion or so that it says it will bring to the United States as needed. “We already repatriate funds in the normal course of business to help meet our domestic cash requirements,” Ms. Campion said.

By moving its tax headquarters to Ireland, Pfizer could radically simplify its tax planning. Although tax inversions are hardly ideal for the American tax base, Professor Weil said, a wave of them might actually be better for the economy than the situation we have now. Under the current alignment, he said, American multinational corporations like Pfizer might invest more money in the United States, not less, if they had their tax domiciles abroad. They might be more inclined to do so, he said, because they could book earnings abroad and bring the money back to America “without incurring that additional United States tax.”

Mr. Kleinbard, a professor of law and business at the University of Southern California, said the morality of tax inversions was not an issue that C.E.O.s should even be expected to address. “There is a moral imperative here, but it falls on the shoulders of Congress, not on corporations,” he said.

C.E.O.s can be expected to act in their corporations’ self-interest under the economic model in place now, he said. “If the results are plainly inconsistent with the national interest, Congress has to fix things,” he said. “We shouldn’t expect the corporate community to hold itself to values higher than the marketplace.”

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