Spending $100 billion in shareholder money on a hostile cross-border takeover just to save $1 billion or so a year in taxes would seem the height of upside-down logic.
Yet Pfizer Inc.’s (PFE) bid for U.K.-based AstraZeneca PLC (AZN) involves a proposed “inversion,” in which the combined company would be based in Britain to take advantage of that country’s appreciably lower corporate tax rate.
There have been dozens of such transactions, which in addition to easing the tax burden on future profits allow a U.S. company to access whatever cash it has accumulated overseas from past earnings. U.S. tax law requires that American companies pay taxes to the Treasury on any retained earnings they bring home, leading U.S.-based multinationals to pile up nearly $2 trillion in cash in foreign accounts.
As I discuss with Yahoo Finance Editor-in-Chief Aaron Task in the attached video, the Pfizer bid for AstraZeneca is not principally motivated by "tax arbitrage."
The New York-based company, with a market value of more than $200 billion, covets AstraZeneca’s promising slate of cancer and immunology drugs, and is eager to wring cost efficiencies out of a potential combination.
Pfizer CEO Ian Read happens to be a Scottish native, which might or might not be relevant. In either case, sending the message that an acquiring company is willing to re-domicile in the target company’s home country is not a bad tactical move when trying to persuade British executives, shareholders and regulators of the attractiveness of a merger.
Yet the fact that Pfizer’s leadership has been so open about the tax advantages – and implicitly is willing to legally leave its ancestral home and forsake a spot in the Dow Jones Industrial Average – should amplify the debate over U.S. corporate-tax policy. Nearly everyone agrees the tax regime here is too complex, with its high stated tax rate and abundance of loopholes, which lead to less revenue than is sought and more unproductive effort by companies to minimize their bills.
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Pfizer’s effective tax rate last year was 27%, and the U.K. rate is 21% on the way to 20%. The Wall Street Journal placed Pfizer’s full tax liability – including state and local levies – near 40%.
The fact is, large multinational companies aren’t fully “based” anywhere, with revenue streams and operations across the world. This means they can shop for the most advantageous on-paper domicile to maximize their financial flexibility and returns to shareholders.
Does this mean that corporate tax-simplification reform might finally gain traction in Congress and among business lobbyists (who like the idea of lower tax rates but are also protective of industry-specific tax credits)? Would it mean joining in a “race to the bottom,” in which companies compete to slash tax rates to attract companies shopping for a friendly jurisdiction?
These are the kinds of questions that might start to get loud in Washington if this Pfizer gambit goes through, and especially if other big American companies begin to walk a similar path toward more welcoming homes with gentler tax policies.
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