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Pfizer's tax-avoiding megamerger with Allergan sparks outcry
A US$160 billion megamerger announced on Monday would turn US pharmaceutical behemoth Pfizer Inc into an Irish drug company, using a controversial tactic that allows companies to dodge billions of dollars in corporate taxes by renouncing their US citizenship.
Pfizer's deal with Botox-maker Allergan, which would create the world's largest drugmaker, immediately sparked criticism from Democrats and Republicans in Congress who agree that such deals are problematic but have so far not taken legislative action against them.
They slammed the tax loophole called an "inversion," in which a US-based company buys or merges with a foreign company and moves its headquarters to the country with a lower tax rate.
"By nominally moving overseas while continuing to take all the benefits of a US company, Pfizer is gaming the system and will avoid paying its fair share of US tax dollars," Senate Minority Leader Harry Reid said in a statement.
"It's time for Congress to get serious, close the loopholes, and prevent these kind of inversions from happening in the future."
Republicans also denounced the deal, which would slash Pfizer's corporate tax rate to 17 per cent or 18 per cent, according to company leaders, compared to its effective 25 per cent rate.
But some were reluctant to place the blame on companies."Other nations have restructured their tax code to make themselves more attractive to multinational corporations and we must do the same so American businesses can compete on a level playing field," said Rep Patrick Tiberi, a senior member of the tax-writing Ways and Means Committee.
In a call with analysts on Monday, Pfizer chief executive Ian Read said company leaders had paid attention to the political debate around inversions but decided to proceed with the deal because it was a good business move.
"On the political risk, we've assessed this deal looking at the present regulations, the new notices and all the information we can glean, and we believe this deal is a great deal for shareholders, both of Allergan and Pfizer," Mr Read said.
A 2014 estimate by Congress's Joint Committee on Taxation projected that inversions will cost the United States US$33.6 billion over a decade.
Last week, the Treasury Department announced new measures that make it less financially attractive for a US company to move its headquarters to a country where it does little business. But Pfizer and Allergan carefully crafted their deal to sidestep federal efforts to curb inversions.
Allergan, which is about half the size of Pfizer as measured by annual revenues, is technically buying Pfizer - even though the new company will be named Pfizer, it will be led by Pfizer's chief executive, and 11 of the 15 board members will come from Pfizer. The president and chief operating officer will come from Allergan.
Allergan's current shareholders will ultimately own 44 per cent of the combined company, while Pfizer shareholders will own 56 per cent, a division of ownership that is structured to avoid triggering additional taxes. Federal rules subject inverted companies to more taxes if the shareholders of the US company own at least 60 per cent of the shares.
The final combined company is expected to generate an operating cash flow of more than US$25 billion by 2018.
While there's broad agreement that action should be taken to curb inversions, politicians disagree on how it should happen. Republicans have argued that curtailing tax inversions should be part of comprehensive tax reform, but Democrats have pushed for immediate action while a broader overhaul of the corporate tax code is worked out.
And lawmakers remain at odds over whether and how to lower the corporate tax rate of 35 per cent, one of the highest rates in the world. Both sides have also acknowledged that addressing the problems in the complicated tax code will take time, which will become more difficult as the presidential election draws near.
Several presidential candidates weighed in on the deal."This proposed merger, and so-called 'inversions' by other companies, will leave US taxpayers holding the bag," Democratic candidate Hillary Clinton said in a statement, calling on Congress to act and force large corporations to pay "their fair share" of taxes.
Senator Bernie Sanders of Vermont called on the Obama administration to block the deal, but Democrats weren't the only ones worried about companies taking advantage of inversions to avoid taxes."The fact that Pfizer is leaving our country with a tremendous loss of jobs is disgusting," Republican candidate Donald Trump said in a statement.
Inversion business deals have been taking place for decades, but the political opposition to them has grown as they have become more common. President Barack Obama has called inversions "unpatriotic," and his adminstration has made a major effort to crack down on such transactions by making them less profitable. The rules made it more difficult for firms to bring cash earned abroad back to the United States tax-free, dampening one of the major benefits of such deals.
The changes prompted some companies to reconsider planned deals. Chicago-based AbbVie and Dublin-based Shire called off a US$54 billion inversion deal after the Treasury issued those rules. Raleigh, North Carolina-based Salix Pharmaceuticals and the Italian firm, Cosmo Pharmaceuticals terminated a reverse merger, citing changes in the political environment.
A Treasury spokesman said the agency does not comment on specific transactions. In a conference call last week, Treasury Secretary Jacob Lew acknowledged the agency's limitation in ending inversions.
"Our actions can only slow the pace of these transactions. Only legislation can decisively stop them," MR Lew said in the conference call.
"There is only so much Treasury can do to prevent these tax-avoidance transactions."
Edward Kleinbard, former chief of staff of the Joint Committee on Taxation, agreed that the Treasury Department has limited power to stop corporate tax dodging."Treasury is trying to hold back the tide with a broom, but that is an unfair position into which to put Treasury. The U.S. Congress owns the tax code," he said.
"What is going on here is a dereliction of duty by Congress, and Treasury is doing the best it can in an impossible situation."
Allergan is best known for making the wrinkle-smoothing treatment, Botox, while Pfizer is well known for making a wide variety of iconic drugs, including cholesterol-lowering Lipitor, the antidepressant Zoloft and the erectile dysfunction drug, Viagra. The companies expect to save US$2 billion over the first three years by eliminating redundancies.
The deal may be additionally risky because it comes at a time when the pharmaceutical industry broadly is under intense scrutiny because of public and political outrage over high drug prices.
Gustav Ando, research director for IHS Life Sciences, a business information and consulting company, said he thought the deal was carefully structured to avoid the issues that sunk past mergers among major pharmaceutical companies seeking to relocate abroad to avoid taxes. But, he said, it is a risky strategy at a time when politicians are already raising questions about drug companies' business models."
This merger isn't meant to benefit patients; it isn't meant to innovate in any kind of way. It's basically a tax inversion strategy, and certainly the benefits won't be passed on to consumers," Mr Ando said.
"It's pretty easy at the moment to paint the pharmaceutical industry in a negative light and this certainly doesn't do anything to help the cause." Pfizer's stock closed down 2.7 per cent at US$31.32, and Allergan's stock fell 3.4 per cent to US$301.72.