Pfizer-Allergan Merger Casualty of Obama’s War on Inversions

Last November, Pfizer and Allergan announced they would embark on a $160 billion merger, the largest merger ever within the pharmaceutical industry and the third largest corporate merger in history.

Pfizer generates over 10 times more revenue than Allergan, but under a transaction often called a reverse merger, Allergan would have acquired Pfizer. The new company, renamed 'Pfizer, PLC,' would shift its headquarters from New York City to Dublin, Ireland, which is Allergan’s home. All that was needed was for Allergan to shed one of its divisions, shareholders had to approve the merger in both proxy votes, and the U.S. and European Union would have to give the green light.

But the Obama administration said no way.

In a move that will amplify the screams for Obama’s head on a plate as he tries to circumvent Congress, yet again, by using his executive authority, the Department of the Treasury blocked Pfizer’s plan by issuing yet more new rules to close current legal loopholes that allow for inversions. Occurring with increased frequency in recent years, inversions, say their critics, allow for companies to move their official tax residence abroad so that they can benefit from a lower corporate tax rate. The results have been Burger King becoming based in Canada yet owned by a Brazilian conglomerate; once Massachusetts-based Medtronic now has its headquarters in Dublin.

In this week’s case, Treasury targeted earnings stripping, a method of avoiding taxes by having an American subsidiary of a foreign company pay massive amounts of interest to its foreign corporate parent. Another new rule issued limits the amount of debt that a U.S. subsidiary can issue to its foreign parent as a dividend distribution.

The Obama administration first took measures to whittle away at inversions’ tax benefits in fall 2014. Obama and Secretary of the Treasury, Jack Lew, argue that such transactions leave the middle class as the ones paying for the balance of everything from infrastructure to the country’s defense and education programs.

Those who oppose Obama’s executive branch maneuvers point out that when state corporate tax rates are factored, the U.S. federal corporate tax rate can reach as high as 40 percent. Advocates for reforming the U.S. tax code cite statistics that infer the U.S. has the third highest tax rate on the planet, behind only Chad and the United Arab Emirates.

But that argument merits a closer look. Industrialized countries tend to have higher corporate tax rates — that is the cost of doing in business in a country where transparency and the rule of law, not envelopes stuffed with cash, reign supreme. In the UAE, many companies are state-owned — and Abu Dhabi and Dubai brim with low-tax or tax-free economic zones, such as Masdar City, where any company can open up shop.

Furthermore, when looking at the U.S. federal government’s receipts and outlays, it is individuals who shoulder up to 80 percent of America’s tax burden. While corporate taxes contribute only 9 percent of the government’s revenues the upward trajectory in corporate profits indicates some room for paying a bigger portion of the pie. And those taxes are in part paying for roads, bridges, airports, university education grants, job training programs and security home at abroad—from which everyone in the U.S. benefits.

An argument that the tax code at the federal and state level needs reform certainly deserves discussion. Relying on income taxes at the federal level or property taxes to fund state governments clearly is not reliable or sustainable. Politicians of all stripes have suggested a value-added tax (VAT), a common mechanism that provides revenue stability in many countries across the globe. Nevertheless, when it comes to optics, the perception that large corporations and wealthy individuals (as in their support for organizations such as ALEC) run the show in Washington, D.C., state capitals — and to extent even from Panama -- make it hard for many to believe that the world’s largest companies are suffering because of a tax code, outdated or not.

Image credit: Wiki Commons/Norbert Nagel