he White House and Congress erupted in outrage last year when Burger King swallowed a Canadian restaurant chain and drug maker AbbVie proposed a merger with Ireland-based Shire to slash their tax payments to Uncle Sam.
President Obama denounced companies that exploit the tax-avoidance tactic as “corporate deserters.” At the Capitol, leaders from both parties called for swift action to protect the US economy. They filed numerous bills to lower corporate tax rates or close tax loopholes in an effort to quash “inversions” — the fancy legal name for sheltering income by acquiring companies with foreign headquarters.
Then began the inevitable arguments between Republicans and Democrats amid lobbying by big multinational corporations. A year of legislative gridlock later, the bills have moved nowhere.
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Now the biggest pharmaceutical deal ever has been proposed to gain inversion’s massive tax advantages. Pharma titan Pfizer, taking the risk of being labeled a “corporate Benedict Arnold,” is trying to merge with Allergan, which has much of its workforce in the United States but is headquartered in Dublin.
In an inversion, a US firm nominally moves its base overseas while retaining most of its employees and management in the United States. Dozens of companies, including medical device maker Medtronic, have executed the strategy since the 1980s. Experts said inversions enable a merged corporation to move funds “trapped” in other countries into the United States without paying US taxes. That makes the money available for shareholder dividends, stock repurchasing plans, management bonuses, or underwriting new research and development.
The Pfizer move renewed the rancorous debate over tax avoidance, and apparently has prompted the Obama Administration to make changes on its own.
Treasury Secretary Jacob Lew has said that only legislation can stop inversions, but he issued administrative rules Thursday to make them harder to complete.
The Treasury Department took a first step to tighten rules, after the president decried inversions last year, to keep large US companies from dodging taxes by acquiring small overseas firms. The agency also added restrictions on cash transfers designed to evade US taxes. On Thursday, Lew added rules that, among other restrictions, limit “the ability of US companies to inflate the new foreign parent corporation’s size” to evade earlier merger restrictions, and constrain the merged company from transferring some operations to the new foreign parent to avoid US taxes.
“This is an important step, but it is not the end of our work,” Lew said in a statement. “We look forward to continuing to work with Congress in a bipartisan manner to reform our broken business tax system and to eliminate inversions for good.”
The biggest pharmaceutical deal ever has been proposed to gain inversion’s massive tax advantages.
Advocacy for two possible legislative solutions — lowering corporate taxes versus closing loopholes — cleaves largely along party lines. Republicans argue that high taxes push companies to pursue inversions, while Democrats dispute that corporations pay excessive taxes.
Speaking on the Senate floor earlier this month, Republican Rob Portman of Ohio called the Pfizer plan “another reminder … of just how broken our tax code is … At a combined 39-percent rate, the United States of America now has the highest business tax rate of any of the industrialized countries.”
But at a press conference Wednesday, Democratic Senator Elizabeth Warren of Massachusetts said she had “only one problem” with the story of high corporate taxes: “It’s not true.”
Warren cited tax data showing that few large multinational companies pay close to the top rate, and that due to tax code exceptions and credits, many pay no federal tax. “As of last year, nearly three-quarters of Fortune 500 companies operated subsidiaries in offshore tax havens,” she said. “The game is rigged, and it’s rigged for the really big guys.”
Pfizer financial filings listed its federal tax rate as 20 percent to 25 percent in recent years. The advocacy group Americans for Tax Fairness and the Institute for Policy Studies, a Washington think tank, have reported that the company effectively paid no US income taxes from 2010 to 2012, receiving $2.2 billion in tax refunds during that period.
Democratic Senators Dick Durbin of Illinois and Sherrod Brown of Ohio have proposed legislation they describe as “pay what you owe before you go” — requiring companies to settle tax bills before an inversion could be approved. Other Democratic proposals include lowering corporate tax rates to the average for competing nations and allowing companies to repatriate profits earned abroad at tax rates as low as 6.5 percent.
Several Republican-sponsored measures also called for reduced rates on repatriated funds — down to 5.25 percent in a bill by Senator John McCain and Congressman Trent Franks, both of Arizona. Senate Finance Committee Chair Orin Hatch, a Utah Republican, and House Ways and Means Committee Chair Kevin Brady, a Texas Republican, generally favor comprehensive tax cuts to reduce incentives for inversions.
Kimberly Clausing, a Reed College economist and expert on corporate inversions, said that despite outward disagreement, many Republicans and Democrats agree that lowering corporate rates and closing loopholes are both important. Ohio’s Portman and President Obama, among others, have voiced support for compromise. Yet none of the bills has advanced amid political gridlock.
Clausing blamed, in part, effective lobbying by multinationals for a version of reform that focuses tightly on cutting tax rates rather than closing loopholes. Pharmaceutical Research and Manufacturers of America, or PhRMA, the trade association for major drug makers, said it does not engage with Congress on corporate tax policy.
Clausing and 23 other international tax experts from institutions including Harvard and Columbia universities and the Berkeley, Irvine, and Los Angeles campuses of the University of California recently wrote an open letter to Congress arguing that US multinationals’ tax-avoidance strategies — including decisions to keep profits earned offshore out of the United States — result in actual tax rates that average 13 percent to 19 percent.
Several studies have estimated untaxed foreign profits of US corporations at $2.1 trillion. Half or more of that amount is held in tax-haven countries with very low rates. Pharma companies are among the largest users of offshore tax havens, according to a recent report by Citizens for Tax Justice.
“Pfizer has subsidiaries in the Cayman Islands, Ireland, the Isle of Jersey, Luxembourg and Singapore, but does not disclose how much of its $74 billion in offshore profits are stashed in these tax havens,” the group said in the report.
Despite the impasse in Washington, hope for change lies in both parties’ realization that the tax system has become “an amusement-park ride of loop-de-loop features” that create a multitude of problems, including inversions, Clausing said. She expects overall tax reform after the presidential election.
By then, Pfizer — founded in Brooklyn, N.Y., in 1849 — might be a proud corporate citizen of Ireland.