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?