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What you will pay — but executives won’t — if Pfizer moves to Ireland

Last week, I showed you the adverse consequences for our society should Pfizer become the biggest company to desert our country by buying New Jersey-based Allergan PLC and becoming an Irish company in order to reduce its income taxes.

Today I’d like to show you the adverse tax consequences that a so-called “inversion” by Pfizer, the nation’s second-largest pharmaceutical company, would create for long-time Pfizer investors.

I’ll also show you how Pfizer — assuming it inverts and behaves as other inverters have — won’t help those shareholders cover their inversion-triggered tax bill. And I’ll show you how it will spend millions of (non-tax-deductible) dollars to compensate board members and top executives for desertion-related tax costs.

Still with me? Here we go.

Under current tax law, shareholders of an inverting company have to pay capital gains tax if the company’s stock price on Inversion Day is above their cost. (If the stock price is below their cost, they don’t get a deduction.)

This means that investors who have owned Pfizer stock for a long time in a taxable account will have a whopping tax bill should Pfizer Inc. become Pfizer PLC. That tax comes out of those investors’ pockets — and long-time retail investors might have to sell some of their stock to come up with the cash to pay the bill. If they’re using Pfizer dividends to supplement retirement income, they will have to learn to get by with less.

Compare that with the deal Pfizer will almost certainly give its board members and top executives should it desert.

Under a special provision of the tax code, directors and top executives of an inverting company are subject to a 15 percent excise tax on the value of their stock options, restricted shares, stock appreciation rights and other stock-based holdings other than common stock itself. (They owe the same capital-gains payment on their stock that other holders do — but stock held outright is typically a relatively small part of their overall Pfizer stake.)

Let’s see how this works by looking at the holdings of Ian Read, Pfizer’s chief executive. By my reading of the company’s most recent proxy statement, Read has 6,343,307 shares worth of restricted stock, options, stock appreciation rights and such that are worth about $78 million at Pfizer’s price of $33.50 as I write this. (His common stock owned outright was worth about $8.4 million, according to information the company gave me.)

Read’s $78 million would trigger an excise tax of $11.7 million, for which the company will doubtless reimburse him. And that’s a minimum.

I originally thought that Pfizer would surely give Read a “gross up” payment to compensate him for the $1.8 million of tax due on his excise tax comp. That’s what inverting companies have usually done.

However, Pfizer spokeswoman Joan Campion — who declined to comment on my numbers or to discuss any aspect of a possible Pfizer inversion — referred me to a “no gross-up” reference in Pfizer’s proxy statement. “We do not provide tax ‘gross-ups’ for perquisites or other benefits provided to our executive officers, other than in the case of certain relocation expenses,” the proxy says.

There’s no way to tell if the “no gross-up” rule would apply to an inversion-related excise tax. If it doesn’t, Pfizer’s total cost — including the $11.7 million, a $1.8 million gross-up and a second gross-up to cover Read’s 15 percent tax on the $13.5 million would be about $15.9 million.

However, even if Read would get only $11.7 million, that’s still $11.7 million more than regular stockholders will get. Not to mention millions more going to other top executives and to board members. With or without gross-ups, there’s one word that comes to mind when I contemplate the prospect of small fry suffering while big fish are made whole: gross-out.

FOOTNOTE: Tax expert Robert Willens says that Pfizer would get an earnings windfall of about $21 billion should it invert. That’s money that it has set aside on its earnings statements for U.S. taxes on foreign profits that it hasn’t brought back to the United States. Should Pfizer use the inversion technique that Willens is predicting, he says those taxes will never have to be paid. So Pfizer would get a multi-billion-dollar desertion bonus. Isn’t accounting fun?