Pfizer sparks new chatter about tax inversions in Washington

November 2, 2015 09:10 AM

Pfizer Inc., the largest U.S. drug maker, may soon redomicile in Ireland should it complete a massive acquisition of Dublin-based Allergan (AGN), the manufacturer of Botox.

Though a process known as an “inversion,” an American company can purchase a foreign company and them move its headquarters on paper to the target’s country in order to take advantage of its lower tax code.

Last September, after a string of inversion in the medical technology and healthcare fields, the U.S. Treasury Department strongly advised new rules to prevent companies from leaving the country and taking its tax revenue with it.

Washington says it's losing money.

Companies believe the money belongs to shareholders and is required to spur growth.

The Pfizer deal is especially eye-opening given that the merger would create the world’s largest drug maker over night. Pfizer (PFE) currently has a market capitalization of $210.6 billion, while Allergan’s market cap is roughly $119.1 billion.

Under current rules, it doesn’t appear that anything is poised to stop it. Although tax reform has been a central issue during the Presidential debates, Congress and the President are unlikely to make any changes to rules prior to the 2016 election. The United States has the highest corporate tax code out of any of the 34 countries in the Organization for Economic Co-operation and Development.

Only two non-OCED nations, Chad and the United Arab Emirates have a higher tax rate.

Politicians in Washington have sounded off on the debate every time a major U.S. company has sought a better tax deal. This morning, Senator Dick Durbin (D-Ill.) railed Pfizer and firms that have considered tax inversions.

“When corporations choose to invert and don't pay their fair share of taxes, they leave the rest of us to pick up the tab,” Durbin said. “That isn't right.”

Meanwhile, Republican Kentucky Senator and Presidential candidate Rand Paul has long proposed the lowering of tax rates and elimination of loop holes, in addition to a low-one time charge to get companies to bring foreign cash back to the U.S.

“The tax rates in this country are obviously far too high,” Paul said in an interview with Futures Magazine last fall. “We have some of the highest tax rates in the world, and we’re seeing the results firsthand. Citizens are leaving the country at astonishing rates, and companies like Pfizer, Medtronic, and countless others are leaving the country for lower tax jurisdictions. We are going to pay a large economic price if we don’t implement a more competitive tax code.”

Republican front-runner Donald Trump offered his plan during Wednesday night’s debate.

“We're reducing taxes to 15%," he said. "We're bringing corporate taxes down, bringing money back in, corporate inversions. We have $2.5 trillion outside of the United States, which we want to bring back in."

In the coming weeks, expect tax inversions to pop up in both the Democratic and Republican debates, and should more rule tightening be proposed by the Treasury Department, look for more U.S. companies to consider a move overseas in order to escape the highest-taxed country in the world for companies – the land of the brave and the free.

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