Pfizer bids for U.K. address with U.S. tax revamp stalled
American companies looking for lower tax bills are heading for the exits, and Congress is doing nothing to stop them.
Pfizer Inc. is the latest corporation to consider reducing its tax bill by moving its legal address outside of the United States, proposing an acquisition of London-based AstraZeneca Plc that would allow Pfizer to reincorporate in the U.K. while top executives remain in New York.
Pfizer would join at least 19 companies making or contemplating similar transactions, including Chiquita Brands International Inc. and Omnicom Group Inc., the nation's largest advertising firm. A stalled proposal from President Obama to limit such deals would raise $17 billion over a decade.
American lawmakers have responded with little outrage and no plans for a quick law to limit the transactions, known as inversions. Instead, they cite the deals as fuel for a revamp of the tax code that's probably years away. That gives companies a window to look for offshore mergers.
“Members of Congress are not swayed as easily nowadays by all the rhetoric about corporate tax cheats and companies being traitors because they're moving to Ireland,” said Herman Bouma, a Washington-based senior tax counsel at Buchanan, Ingersoll & Rooney P.C. “There doesn't seem to be that many members upset about the inversions happening. They're more upset about the way their tax code is, that causes companies to want to do that.”
These transactions have become attractive in part because of the increasing disparity in countries' marginal corporate income tax rates, which are typically higher than what companies actually pay.
Ireland, which will be the new home address for Charlotte, N.C.-based Chiquita, the banana distributor, has a 12.5 percent rate. The U.K.'s rate is 21 percent and will decline to 20 percent next year, with no tax on active businesses outside of the country.
In addition, the U.K. offers a 10 percent rate on profits attributable to U.K. patents, which is attractive to companies such as Pfizer, the largest U.S.-based drug company and maker of Advil and Viagra.
In contrast, the top U.S. corporate rate is 35 percent. Companies also must pay U.S. taxes when they repatriate foreign profits after receiving credits for foreign taxes.
Those disparities mean an incentive for U.S. companies to look overseas for takeover targets. Executives can continue running their companies from the United States.
“The way we're structuring this is, it's fully compliant with the appropriate laws,” Ian Read, chief executive officer of New York-based Pfizer, told analysts on a call yesterday after the company made its interest in AstraZeneca public. “It's in my fiduciary responsibility to maximum return to shareholders, and I don't actually see that that is a conflict with the interest of the U.S. government.”
Last year, Pfizer reported an effective tax rate of 27 percent. The company's rate would be lower after acquiring AstraZeneca; Read and other corporate executives wouldn't quantify the benefit.
The spate of inversion deals mirrors what happened in 2001 and 2002, when companies including Ingersoll-Rand Plc and Cooper Industries Plc moved abroad.
Then, Congress effectively imposed a moratorium as the top members of the Senate Finance Committee announced plans to advance legislation and said any bill would be retroactive to that date.
Two years later, the ensuing law prevented companies from receiving the tax benefit of an overseas merger if their existing shareholders still owned 80 percent or more of the company's stock after the deal.
In the budget plan Obama released this year, he proposed lowering the 80 percent threshold to 50 percent. That plan hasn't moved forward in Congress. While the Internal Revenue Service has made a few changes to tighten the rules, that hasn't stopped most of the deals.
Instead, lawmakers have focused on international tax policy changes as part of a broader — and stalled — effort to revamp the entire tax code.
“How many more companies have to be based in lower-taxed jurisdictions before we get the message?” said Rep. Dave Camp, the chairman of the House Ways and Means Committee.