Corporate taxes have become a hot item since Pfizer’s announcement last week that it has made a $160 billion deal to become the biggest tax deserter in U.S. history.
Numbers fill the air like autumn leaves on a windy day — except that the numbers are being shouted rather than falling quietly. Alas, as we will soon see, most, if not all, of the numbers being flung around are totally inaccurate.
New York-based Pfizer, as you know, says it wants to lower its U.S. corporate income tax bill by combining with Allergan, a faux-Irish firm that deserted the United States in 2013 but continues to be run out of Parsippany, N.J.
Okay. So what’s Pfizer’s U.S. corporate income tax bill for a given year? What’s Allergan’s? Good questions — to which you can’t get answers. No one outside a company and some of its advisers knows what it pays for a given year, and none of them will tell us.
Let me explain.
Most of the tax information floating around comes from companies’ 10(k) annual reports to shareholders. But companies typically file their 10(k) at least six months before they file their corporate tax returns.
That’s right. A company that operates on a standard calendar year has to file its 10(k) by early March. But it has until Sept. 15 to file its tax return if it asks the Internal Revenue Service for an extension, as big companies typically do.
So unless the people working on tax numbers for a company’s 10(k) have a time machine that will let them see six months down the road, they don’t know what the company will tell the IRS about taxes incurred for that year.
Combine this important but rarely cited timing discrepancy with differences between what financial regulators and the IRS consider taxable income, and it’s impossible for outsiders to know what a company’s tax-incurred number is for a particular year. Outsiders can — and do —try to derive it. But there’s no way to know whether they’re right.
Is this problem solvable? Absolutely. The Securities and Exchange Commission or the Financial Accounting Standards Board could fix the problem in a minute by requiring companies to disclose the “taxes-incurred” number from their corporate tax returns. But neither the SEC nor FASB has been willing to do this, and won’t say why.
The companies that claim to be “demonized” by analyses based on their financial reporting could disclose the actual tax they incur — but they won’t do that. When I’ve asked some companies why, the answer is, “We don’t have to and we don’t want to.”
If companies were required to disclose year-by-year, taxes-incurred numbers for the past five years and to disclose annual numbers from now on, we would be able to have an informed conversation about the U.S. corporate income tax. The stated top rate is 35 percent. But the effective rate is clearly much lower, especially for the 50 or so companies that account for the bulk of the $2 trillion-plus of U.S. corporate profits stashed in offshore countries to avoid U.S. tax.
Let’s return to Pfizer.
Chief executive Ian Read claims Pfizer has to desert our country for tax purposes to be competitive with foreign firms. But according to two separate reports that I consider credible — one by Americans for Tax Fairness, the other by Robert Willens — Pfizer almost certainly pays considerably less U.S. corporate tax than it reports to shareholders.
Pfizer is invoking its 25.5 percent worldwide reported tax rate to justify moving its domicile to Ireland, which has a 12.5 percent rate.
Both Willens and Americans for Tax Fairness — two players that have little in common — think that Pfizer’s actual worldwide tax rate is only about a third of what it reports. They both say that much of the difference between Pfizer’s stated rate and its estimated actual rate is attributable to the company’s actual U.S. taxes being far lower than what it shows its shareholders. (I’ll spare you the details; if you want to know, ask the tax techie of your choice.)
Pfizer’s response: “We comply with all applicable accounting and tax laws in the jurisdictions in which we operate and pay all taxes due.”
Now a modest suggestion. Leaders in Congress or the White House could do something simple and constructive by asking (or ordering) the SEC or the accounting standards board to require companies to disclose the “taxes-incurred” number from their corporate tax returns. This would require minimal effort by the companies.
This wouldn’t provide a solution to our messed-up tax system, of course. But the information would make it a lot easier to have a fact-based conversation about corporate taxes. Which, in this post-Thanksgiving week, would give us something to be thankful for.