Pharmaceutical giant Pfizer may free itself from paying corporate taxes in the United States and become the biggest drug maker in the world (based on sales) if its proposed $160 billion merger with Ireland-based Allergan gets the green light.
The transaction will be the biggest takeover in the health care industry and the largest corporate tax inversion ever, USA Today reports.
A tax inversion is when a U.S. company, like Pfizer, merges with a foreign firm, like Allergan, and then moves its corporate headquarters overseas to a lower tax nation (for example: Ireland) in an effort to avoid U.S. taxes.
Pfizer, maker of Viagra and Lipitor, attempted a similar merger with U.K.-based AstraZeneca last year, but Pfizer’s proposal ultimately was rejected by the British company, Slate reports.
The board of directors for Allergan, the company best known for manufacturing Botox, has unanimously approved Pfizer’s $160 billion merger proposal, according to a press release.
“The combination of Allergan and Pfizer is a highly strategic, value-enhancing transaction that brings together two biopharma powerhouses to change lives for the better,” Brent Saunders, Allergan CEO, said in a statement. “This bold action is the next chapter in the successful transformation of Allergan allowing us to operate with greater resources at a much bigger scale.”
According to Pfizer, the two companies will merge under Allergan PLC, which will then be renamed Pfizer PLC. The merged company will retain Allergan’s tax residency in Ireland, where its principal executive offices and main headquarters will be relocated (at least on paper) “while paying a projected tax rate of about 17 or 18 percent, down from Pfizer’s current 25 percent tax bill,” Slate said. The merged company’s global operational headquarters will be in New York.
In a recent post on the Tax Justice Blog, Matt Gardner, executive director of the Institute on Taxation and Economic Policy, wrote that the Pfizer-Allergan merger likely won’t change the way Pfizer is doing business, because the company has “already been doing its best to pretend it’s a foreign corporation.” Gardner explained:
In each of the past seven years, Pfizer has reported losing at least a billion dollars a year in the United States while making money hand over fist in other nations. Between 2008 and 2014, Pfizer claims it lost $21 billion in the U.S. while enjoying $104 billion in foreign profits. Is it plausible that the maker of Viagra and ChapStick hasn’t made a dime of profits in the United States since 2007 even as it has averaged $15 billion a year in foreign profits?
A more likely explanation is that the company has been aggressively shifting its U.S. profits into foreign tax haven subsidiaries. A recent Citizens for Tax Justice report found that Pfizer has a stunning 151 subsidiaries in known foreign tax havens, more than all but five other Fortune 500 corporations. It’s probably no coincidence that the company also has been very aggressive in declaring its profits to be “permanently reinvested” offshore: At the end of 2014, Pfizer had $74 billion in offshore cash, fourth highest among the Fortune 500.
The proposed merger will likely face regulatory scrutiny in the U.S. and Europe. Allergan and Pfizer shareholders will also vote on the transaction.
The Pfizer-Allergan merger comes less than a week after the Obama administration rolled out new rules meant to curb corporate inversions. But it’s unlikely that the new rules will affect the Pfizer merger “in part because the transaction is structured to have Dublin-based Allergan, with a market capitalization of roughly $122 billion, acquire New York City-headquartered Pfizer, which has a market capitalization of approximately $200 billion,” USA Today said.
Allergan shareholders would hold about 44 percent of the merged company’s shares, and Pfizer investors would hold 56 percent. To be deemed a tax inversion under the federal tax code, Pfizer ownership would need to be at 60 percent or above, USA Today explains.
The corporate tax rate in the United States is 35 percent, the highest in the developed world. But a 2013 report from the U.S. Government Accountability Office found that profitable corporations paid just 13 percent in federal income taxes in 2010 after accounting for credits, exemptions and deductions.
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