Friday, November 27, 2015

High Taxes May Push Pfizer to Ireland: Botox to Reduce Viagra Tax Wrinkles

Pfizer, a 166-year-old New York City headquartered company, is considering leaving the U.S. for more tax-friendly Ireland in what is termed a tax inversion. Pfizer, a $300 billion U.S. biopharmaceutical firm, will purchase the smaller Irish firm Allergan, maker of Botox, for $120 billion. Pfizer, producer of Viagra, will then move its U.S. headquarters (where its current corporate income tax rate approaches 40 percent) to Dublin, where it will have a 12.5 percent tax rate.

In 2014, Pfizer paid U.S. income taxes of $3.1 billion. Under the Dublin rate, Pfizer could have saved approximately $2 billion in income taxes.

The U.S. has suffered the loss of 55 firms via tax inversions in the past year. It has the third highest corporate income tax rate in the world at 39.1 percent, exceeded only by Chad and the United Arab Emirates. The avalanche of inversions pushed President Obama to brand the inversions as "unpatriotic."

Instead of issuing such hyperbole, Obama should take action that would both increase tax collections and reduce the legal and administrative costs associated with tax inversion deals.

U.S. firms are currently estimated at holding more than $2.1 trillion outside the U.S. By reducing the income tax rate on repatriated earnings from 39.1 percent to 10 percent, current tax collections would rise by as much as $210 billion and importantly, it would reduce the motivation to engage in an inversion. This action should then be followed up by a permanent corporate income tax rate cut with the elimination of many tax loopholes.

But instead of positive legislative steps such as this, the U.S. Treasury responded with stiffened regulations in a futile effort to limit such corporate moves. Unfortunately, Pfizer will not be the last U.S. firm to hoist shareholder value by moving abroad.

Ernie Goss

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