Pfizer Lets Loose a Hornets’ Nest Over U.S. Corporate Tax Rates

Pfizer is bidding to acquire AstraZeneca in large part so that it can dodge the U.S. corporate tax rate of 35 percent. How will they do this? By shifting its corporate headquarters to the UK, AstraZeneca’s home, after the acquisition and paying that country’s 20-percent rate. But in pursuing the merger, Pfizer has kicked a political and economic hornets’ nest that still hasn’t emptied.

Because of Pfizer’s action, CEOs of other U.S. corporations have been put on notice that they’re being monitored for moves toward “inversion” of their headquarters for tax avoidance. And many previous such moves are being examined.

Politicians, including powerful U.S. Sen. Carl Levin, (D-Mich.) have already said they’re gunning for the tax “loopholes” that have led Pfizer and other companies to consider such a move. The U.S. is even talking about forming a six-nation alliance of G20 countries, including the UK and China, to fight corporations’ attempts to dodge national taxes.

Another complication is that Pfizer’s investors could face a tax hit if the pharma giant goes through with the deal.

Chrysler CEO Sergio Marchionne said earlier this year that he planned to move the headquarters of the new Fiat Chrysler Automotive to London, of all places, mainly to avoid higher corporate tax rates in Italy and the U.S. Italy’s rate is 31.4%. Even Russia, a socialist country, has rates lower than Fiat Chrysler’s home countries.

Meanwhile, an estimated $2 trillion in non-repatriated corporate profits are being held overseas because of the high U.S. rates. For head-scratching American policymakers, politicians and economists wondering why the U.S. economy has had so much difficulty gaining traction; one answer is that these are corporate funds that aren’t being plowed back into the home economy.

Brits are celebrating that “hundreds of multinational companies are lining up to establish operations in the UK, paving the way for thousands of new jobs and billions of pounds in extra tax revenues,” as The Telegraph put it. There is “considerable appetite from U.S. businesses to increase their investment in the UK,” Kevin Nicholson, head of tax at PwC in the UK, told the newspaper.

This has followed the British government’s easing of taxes on profits of foreign subsidiaries, which in effect means that only UK-generated income is taxed there.

President Obama, in his 2012 re-election campaign, proposed cutting the U.S. corporate tax rate to 28 percent with a minimum tax on foreign profits to discourage cash-parking abroad. Meanwhile, U.S. Rep. Dave Camp (R-Mich.) wants to see a 25-percent rate, also with a treatment of foreign profits.

Various analysts are joining politicians and American CEOs in urging their own government to slash tax rates. “The current tax rules reduce investments in the American economy and distort business decisions of American executives,” Robert Pozen, a nonresident senior fellow in economic studies at the Brookings Institution, wrote on CNNMoney.com. “Although the U.S. corporate tax rate is almost the highest in the world, the U.S. Treasury receives relatively little revenue from taxes on foreign profits from multinationals.”

Not surprisingly, analysts from the left allege that the real problem is that American CEOs want to see home-country tax rates go down in a perilous “race to the bottom” that would harm U.S. government spending and the economy in a competition with other countries to keep corporate headquarters.

“Tax avoidance feels like a full-fledged business strategy, with American citizens as the losers,” Steven Rattner, a Wall Street executive who was instrumental in orchestrating the General Motors bailout in 2009, wrote in The New York Times. He bemoaned how the share of corporate profits paid in taxes has “dropped significantly” through the “inversion” of legal residences by companies.

Rattner called for restrictions on the use of inversions and taxation of merged companies as American companies if they are “managed in the United States and [have] substantial business here.” Or just scrap the “unworkable corporate tax system altogether and instead tax shareholders,” he said.

Additional reading:

Pfizer’s AstraZeneca Bid Marks Tax-Fueled Trend in Cross-Border Deals

Pfizer’s bid for AstraZeneca: It’s time to reform the U.S. corporate tax system

Marchionne to locate Fiat Chrysler headquarters in London