Venue-Shopping Under Globalization

I heard about this story yesterday and found it interesting. Pharmaceuticals giant Pfizer which started in a storefront in New York and has been headquartered there ever since is thinking of moving its “domicile” to Britain:

U.S. pharmaceutical giant Pfizer Inc. wants to buy AstraZeneca, and not just for its pipeline of cancer drugs. Acquiring the British company would also give Pfizer shareholders welcome relief from a U.S. corporate tax rate that is among the world’s highest. Instead of paying punitive rates to return its money to the U.S., Pfizer figures it can get a better return paying $100 billion or so to buy a foreign company.

Pfizer Chairman and CEO Ian Read took pains on a Monday call with securities analysts to say that the “primary drivers” behind his merger attempt are the “improved growth prospects we see in the innovative businesses and the redundancies we can take out.” In other words, Pfizer aims for a combined firm to stake out leading positions in immunology, oncology, vaccines and chronic diseases. This is what companies always say, and it may turn out to be true, though so far AZ is resisting Pfizer’s entreaties.

But Pfizer’s presentation also noted the deal would be “structured to achieve an efficient tax structure.” Mr. Read noted the “negative impact” of the U.S. tax code, which would be “problematical” if applied to the money AstraZeneca now earns in the U.K.

That’s because the combined state-federal corporate income tax rate in the U.S. is nearly 40%, compared to the 21% rate in the U.K. Though Pfizer is a U.S. company, more than 70% of its cash—amounting to more than $35 billion—is sitting overseas. To bring it back home would expose shareholders to the punitive U.S. rate. Instead, Pfizer aims to use some of that cash pile to finance the merger, and Mr. Read also plans to domicile the new combined holding company in the U.K., though its headquarters would remain in New York.

As it works out Pfizer hasn’t paid federal corporate income taxes for several years. The real losers in this deal would appear to be New York State and New York City—the company paid a couple of hundred million in state and local taxes in 2012.

My sense is that characterizing Pfizer’s plans as an attempt at avoiding taxes is a bit of an over-simplification, particularly since they’re not paying federal taxes. I think the company has realized that they can escape both the cost of the tax and tax avoidance alike by picking up stakes. I don’t know how many people Pfizer has in its tax department (GE, for example, has more than 1,000) but I’m sure it has quite a few highly-compensated professionals.

Not only will New York lose the corporate tax revenue, it will lose jobs which in this climate might be a more serious problem.

All of this highlights the urgent need for major tax reform in the United States. How many big companies can we afford to drive away?

7 comments… add one
  • Modulo Myself

    How many actually pack their bags and head to the City of London tax haven?

    Also, a more important problem seems to me to be the huge pile of cash that Pfizer is sitting on. They are, after all, a pharmaceutical company. Shouldn’t it being used to finance actual research, rather than keep the stock price high for executives?

  • One of my earliest posts was on this very subject. Based on the numbers, pharmaceutical companies see R&D as overhead to be minimized rather than production to be optimized. For large pharmaceutical companies R&D increases with inflation while lobbying (for example) rises with net revenues. Some people seem to view this as a coincidence. Or, alternatively, too complicated for me to worry my pretty little head about it.

  • ...

    Based on the numbers, pharmaceutical companies see R&D as overhead to be minimized rather than production to be optimized.

    This reminds of of your comments over the years on business models. Are you seeking to maximize sales, profits, revenues, etc? Who are your customers? (It was a bit a shock to me when you pointed out that automobile makers in the US do NOT have drivers of cars as their customers – but dealerships instead.) Where does the revenue come from? Where does the profit come from? (These last two are favorites of Drew, understandably.)

  • TastyBits

    @Dave Schuler

    Too few people understand your point or its implications. It is not supposed to occur according to conventional capitalist theory. Conservatives especially fall into this thinking because they do not understand how a business actually maximizes its profits.

  • Ben Wolf

    I’m reminded of Benjamin Franklin:

    All Property, indeed, except the Savage’s temporary Cabin, his Bow, his Matchcoat, and other little Acquisitions, absolutely necessary for his Subsistence, seems to me to be the Creature of public Convention. Hence the Public has the Right of Regulating Descents, and all other Conveyances of Property, and even of limiting the Quantity and the Uses of it. All the Property that is necessary to a Man, for the Conservation of the Individual and the Propagation of the Species, is his natural Right, which none can justly deprive him of: But all Property superfluous to such purposes is the Property of the Publick, who, by their Laws, have created it, and who may therefore by other Laws dispose of it, whenever the Welfare of the Publick shall demand such Disposition. He that does not like civil Society on these Terms, let him retire and live among Savages. He can have no right to the benefits of Society, who will not pay his Club towards the Support of it.

    I suspect he’d ask why we would allow private individuals to remove to another country the public wealth of Pfizer corporation.

  • steve

    We should do away with the corporate income tax. Let’s put thousands of tax lawyers out of work! That said, you wont find me crying for Big Pharma. Consistently high profit margins and they dont pay much in taxes. They prolong patents by changing the dose of an old medicine and then give it a new name. Quite a scam. Anyway, let’s allow for the reimportation of drugs for pharma companies domiciled outside of the US.


  • Guarneri

    “It was a bit a shock to me when you pointed out that automobile makers in the US do NOT have drivers of cars as their customers – but dealerships instead.”

    Seriously? Standard distribution model.

    But I seriously doubt Dave fails to understand where the buyer decision ultimately resides. Think of the dealers as McDonald’s franchisees, where corporate determines product, promotion etc.

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