By Melissa Ruby, Opinion Writer
Last year, U.S. pharmaceutical behemoth, Pfizer, and Irish-based Allergan began collaborating on a deal which would allow Pfizer to buy Allergan. The deal was meticulously planned and abided by all current U.S. regulations.
On April 6, 2016, however, the companies cancelled the deal due to new regulations announced by the Obama administration earlier that week, which effectively made the deal unfeasible.
The deal Pfizer and Allergan were constructing is called an inversion. This is when one company buys out another company and chooses to change its county of domicile. In this case, Pfizer would purchase Allergan PLC, and then reincorporate as an Irish company so that they could avoid high U.S Corporate tax rates.
At 39 percent, the U.S. has the third highest corporate tax rate in the world. Only Chad (at 40 percent) and the United Arab Emirates (at 55 percent) have rates which exceed the U.S. corporate tax rate.
In addition to having a high tax rate, the U.S also has what is called a “worldwide” tax rate. This means that any U.S. company doing business abroad is taxed twice on the same income.
For example, if Pfizer makes a profit in Ireland, it is subject to the Irish corporate tax rate of 12.5 percent. Then, when Pfizer brings that money back to the US, the company must pay an additional 26.5 percent.
Other countries, including Ireland and Canada, have what is called a “territorial” tax rate. This means that corporations pay taxes only once, to the county where the revenue was generated, not twice (in both the country where the income was generated and the country where the corporation is domiciled).
The tax burdens imposed on business by these two factors are particularly onerous for U.S. companies. According to the Congressional Research Service, between 2004 and 2014, forty-seven companies have chosen to leave their U.S domicile for more friendly tax rates overseas. Companies, including Pfizer, are finding that the US tax code prevents them from being competitive in the current market.
Ian Read, Pfizer’s CEO, told the Wall Street Journal that by lowering their taxes, they could effectively spend $2-3 billion dollars more on research and development.
That could mean new cancer treatments, new drugs for depression, etc. However, due to high tax rates, U.S. based companies do not have the extra funds to pursue as many new opportunities as their competitors.
In the interest of good business practices, these companies try to move elsewhere to regain their competitive edge. They are not trying to be unpatriotic as some politicians seem to claim.
The Pfizer-Allergan inversion did not sit particularly well with many politicians, as the US stood to lose large tax revenues.
According to the Wall Street Journal, Obama stated that inversions are “one of the ‘most insidious tax loopholes out there. This attitude prompted him to encourage the Treasury Department to issue new regulations.
The resulting regulations essentially stripped Allergan of all of its acquired assets, for the purpose of inversions, leaving Allergan at 1/3 its actual size. This essentially means that a deal where the companies, of relatively equal size, would no longer be, resulting in a loss of the benefits of inversion.
It is understandable that he would want to keep such a profitable company within the grasp of U.S. tax laws, however, his move does little to encourage businesses to remain. In fact, the government’s move may be damaging to U.S. government-business relations, as it was made after months of planning, and was specifically designed to get at the heart of the Allergan/Pfizer deal. This means that the time, money, and energy the company spent constructing the deal was lost.
Essentially, the message the government is sending is that companies cannot rely on the stability of regulations. Instead, regulations can be changed on a whim, simply because an administration does not like the prospect of losing billions of dollars. However, part of good governance and part of making your country attractive to businesses is making certain that these institutions can trust the laws.
In conclusion, the regulations put out by the Treasury department do nothing to incentivize foreign domiciled companies to relocate to the US. If Obama cares about increasing the amount of companies, revenues, and jobs that the United States receives, then tightening the reigns as a parent does to a disobedient child is not the answer.
Whilst such a policy may make current companies more wary of leaving, it will not attract new companies. It will not stop these companies from finding new loopholes. The only way to correct this problem is to allow businesses who choose to domicile in the US a benefit or advantage for doing so. Perhaps they could relinquish the worldwide tax rate.
While this may not solve all the problems it would certainly alleviate one of the key sources of grievances. Our goal should be to provide competitive tax laws, thereby providing a business-friendly atmosphere. Obama’s slap in the face to Pfizer is not a remedy. Instead, it is merely a Band-Aid on a gaping wound that is only growing.
A version of this article appeared in the Tuesday, September 13th print edition.
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