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US faces a dilemma on taxing MNCs

Published Mon, Dec 7, 2015 · 09:50 PM

WHOEVER wins the White House next year will have to deal with an issue of almost-impenetrable complexity and contentiousness: How to tax multinational companies? On the one hand, large global firms - which have never been shy about minimising their taxes through deft accounting manoeuvres - are becoming more aggressive. On the other, so are governments, increasingly desperate to raise tax revenues to pay for ageing societies and cover persistent budget deficits.

The latest evidence of the unavoidable collision is the proposed merger between the American drug giant Pfizer and the smaller Irish pharmaceutical company Allergan - a combination that, if realised, would create a firm valued at roughly US$160 billion and would legally convert Pfizer into an Irish corporation. The deal is driven in part by tax savings. Ireland's basic tax rate on corporate income is 12.5 per cent compared with a maximum US rate of 35 per cent.

The proposed merger attests to a sea change in American corporate attitudes and behaviour. A decade ago, it was inconceivable that a huge blue-chip American company would jettison its US legal identity. Smaller firms with lower public profiles might do so - though even that was frowned upon - but it simply wasn't done by bigger, better-known companies. Pfizer is a long-standing member of America's corporate elite. Its aggressiveness shows how the taboo has eroded.

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