[Ip-health] New York Times Editorial Board: Pfizer’s Big Breakthrough: Global Tax Avoidance

Thiru Balasubramaniam thiru at keionline.org
Wed Nov 25 00:00:16 PST 2015


http://www.nytimes.com/2015/11/24/opinion/pfizers-big-breakthrough-global-tax-avoidance.html

<SNIP>

In addition, inverted companies continue to enjoy the protection of patent
laws in the United States, as well as their connections, official and
unofficial, with federal research agencies — all of which are crucial to
drug-company profits. Contrary to popular belief, much high-risk,
pathbreaking research and development can be traced not to the big drug
companies but to taxpayer-funded research at the National Institutes of
Health.


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The Opinion Pages | EDITORIAL

Pfizer’s Big Breakthrough: Global Tax Avoidance

By THE EDITORIAL BOARD

NOV. 24, 2015


The $160 billion deal to combine Pfizer and Allergan, the maker of Botox,
does not appear to be illegal. But it should be. This merger is a
tax-dodging maneuver that enriches shareholders and executives while
shortchanging the public and robbing the Treasury of money that would pay
for a host of government programs — including education, scientific
research and other services that also benefit corporations.

Pfizer, with a market value of nearly $200 billion, will be acquired by the
smaller Allergan, which is run from New Jersey but technically
headquartered in Ireland. This will allow Pfizer, which is based in New
York, to pass itself off as Irish as well. Once the paper shuffling is
complete, much if not most of Pfizer’s earnings — including those that are
made in the United States — will be taxed at global tax rates that are
generally lower than American tax rates.

In recent years, dozens of American companies have used similar tactics,
known as inversions, to reincorporate in Ireland, Britain and other
countries with lower corporate tax rates than those in the United States —
at a cost to the Treasury conservatively estimated at $20 billion over 10
years. Pfizer’s merger is by far the largest such move.

But if it’s a loss for taxpayers, it’s a great deal for Pfizer. As with
other companies that have “inverted,” the only thing it has to lose is its
tax obligations. Inverted companies almost invariably keep their
headquarters and top executives in the United States. They remain listed on
United States-based stock exchanges, where they raise capital under the
protection of American securities’ laws. The newly combined Pfizer Inc. and
Allergan P.L.C., for instance, will be renamed Pfizer P.L.C. and trade
under the ticker symbol PFE, Pfizer’s current symbol, on the New York Stock
Exchange, according to The Wall Street Journal.

In addition, inverted companies continue to enjoy the protection of patent
laws in the United States, as well as their connections, official and
unofficial, with federal research agencies — all of which are crucial to
drug-company profits. Contrary to popular belief, much high-risk,
pathbreaking research and development can be traced not to the big drug
companies but to taxpayer-funded research at the National Institutes of
Health.

Traditionally, corporate taxation was a way to repay the public for
benefits companies received from federal support. But in recent decades,
corporate taxes as a share of federal revenue have shriveled. Inversions
will only worsen that trend, effectively bolstering corporate profits at
the expense of the public.

Pfizer executives, and the executives of inverted companies, don’t put it
that way. They say they cannot remain competitive if they have to pay tax
on profits at the relatively high United States top rate of 35 percent.

That claim does not stand up. American multinationals routinely take
advantage of write-offs that reduce the top rate to a much lower level.
Moreover, even an inverted company is supposed to pay tax on earnings
generated in the United States at American rates. But by having a foreign
parent company in one country — Ireland in this case — while remaining
headquartered in the United States, a company can lower its tax bill
through an accounting gimmick known as “earnings stripping,” in which
profits from the United States are shifted to the foreign parent in the
lower-taxed country, thus reducing the American tax bill.

It is not hard to write legislation and draw up rules outlawing inversions,
and bills currently in Congress could put a stop to them quickly. What is
lacking is political will to tell powerful corporate interests to stop. The
Treasury Department under President Obama has issued rules to curb the
practice. But the Pfizer and Allergan hookup is expected to get around
these constraints. The administration could do more, but even more
aggressive executive action would not be as effective as robust legislation.

Reincorporating abroad is a sophisticated variation on the old practice of
avoiding corporate taxes by renting a post office box in the Caribbean and
calling it corporate headquarters. Congress put a stop to those tactics in
2004. It is past time to shut down inversions as well.



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