Just in time for Thanksgiving, Pfizer Inc. has given us a transaction that’s a total turkey for our country: a $160 billion deal that will make it the biggest U.S. corporate deserter in history.
The deal, announced Monday, calls for New York-based Pfizer to combine with New Jersey-based Allergan PLC, which is technically domiciled in Ireland, to become Pfizer PLC. The new Pfizer will be a faux-Irish firm that will be run from New York but will be domiciled in Dublin, which has been Allergan’s domicile since it deserted this country two years ago.
Assuming this deal goes through, Pfizer PLC will pay lower income taxes while continuing to enjoy all the benefits that it and its employees derive from being in the United States. The U.S. corporate tax rate is 35 percent, compared with 15 percent for Ireland. But Pfizer, like many U.S. multinational companies, uses a variety of strategies to lower its tax rate considerably.
This is a very scary transaction. Not only is Pfizer big and prominent — it would become the first foreign member of the Dow Jones industrial average, the quintessential U.S. market indicator — but it takes tax avoidance to a whole new level. Once people examine the technicalities underlying this deal, other companies may well be inspired to structure their desertions the same way Pfizer has.
Because of the deal’s structure, as I will explain in a bit, Pfizer PLC will be able to play amazing tax games. Among other things, it will be able to get its hands on about $70 billion of profit it has held offshore to avoid paying U.S. income tax on it. Now, it will be able to access the cash without paying the tax. And it will probably be able to add to its reported profit some or all of the $20 billion it has set aside on its earnings statement for U.S. taxes on those foreign earnings — taxes that will now never have to be paid.
People are using the polite term “corporate inversion” to describe this transaction. However, it’s technically not an inversion, according to tax expert Robert Willens. That’s because Allergan shareholders will own 44 percent of the combined firm. In an inversion, foreign company shareholders own more than 20 percent but less than 40 percent of the combined company. There’s no specific name for this kind of deal.
The fact that this isn’t technically an inversion — tax law is all about technicalities — means that anti-inversion regulations that the Treasury announced last year and last week will have absolutely no impact on this transaction.
The transaction is a sweet spot — if you think that deserting your country is sweet. Pfizer’s management will stay in control of the new Pfizer PLC. The company can get all its offshore cash without U.S. tax consequences. And it doesn’t get stuck having to compensate its directors and officers for the excise tax that a regular inversion would trigger, and that I discussed in a recent column .
Although Pfizer will save on taxes, some of its shareholders will face a serious tax bill as the result of the transaction. That’s because the deal will trigger capital gains tax for Pfizer holders who own their shares in a taxable account and whose cost basis is below Pfizer’s share price the day the desertion transaction is completed. (If the share price is below their cost basis, they aren’t allowed to take a loss.)
There will be up to $12 billion of cash available to Pfizer holders, who will be able to take money for some or all of their Pfizer Inc. shares. The company said that’s to help holders who will need cash to pay the tax on their gains.
However, I think there’s another motive. Shrinking the number of shares that a Pfizer Inc. holder will own in Pfizer PLC will ensure that Allergan holders, who are getting Pfizer PLC stock, will own more than 40 percent of the company.
As we’ve seen, 40 percent is the magic number for Pfizer to be able to play its enhanced games.
Yes, I know — and have written many times — that deserting companies aren’t breaking the law. But, to repeat myself, just because something isn’t illegal does not mean that it’s right.
I hope that Pfizer’s desertion finally results in some action in Washington to stop desertions temporarily by amending the tax laws — and by setting up new rules to inhibit non-inversion-desertions like the one Pfizer is pulling off.
That would buy us time to set up some carrots and sticks. We could simplify the tax code, reduce deductions and lower the rate; set up penalties such as requiring deserters to underbid U.S. companies to get federal contracts; and coordinate with European countries that are trying to stop corporations from playing one country off against another by using complex tax strategies.
I doubt that will happen — but I would love to be proved wrong. That would be something that we would all be able to give thanks for.