It’s been a long, hard road, but it seems as if Pfizer Inc. might finally succeed at self-deporting itself in order to escape the IRS. The U.S. pharmaceutical giant announced Monday that it plans to merge with Ireland-based Allergan in a $155 billion deal that would set up the largest “corporate inversion” in history while also creating the world’s biggest drugmaker by sales.
Inversions, you may recall, are transactions that allow U.S. companies to move their headquarters overseas by merging with a smaller foreign company, and thereby avoid U.S. corporate income taxes. For their part, Pfizer and Allergan plan to shack up together in Dublin, where the newlywed couple will be renamed Pfizer PLC and continue trading on the New York Stock Exchange while paying a projected tax rate of about 17 or 18 percent, down from Pfizer’s current 25 percent tax bill. This is Pfizer’s second high-profile attempt to move abroad. Last year, it tried and failed to purchase U.K-.based AstraZeneca, whose management resisted the deal, arguing it undervalued their company.
While any sort of business can theoretically use an inversion to reduce its tax burden—Burger King arranged a tie-up with Tim Hortons as an excuse to move to Canada last year—the pharmaceutical industry has been especially keen on this maneuver. There seem to be a few reasons why. America’s corporate tax code is unusual in that it taxes profits earned abroad, which makes it especially irksome for drugmakers, which sell their products all across the globe. There are also lots of pharma companies based in Europe, which means there are plenty of merger targets for American firms considering an inversion. Beyond that, there’s a follow-the-leader effect at play—pharma companies that don’t invert are worried that paying higher U.S. taxes will put them at a competitive disadvantage against those who do manage to move overseas.
These deals are obviously a sign that some companies find the U.S. tax system inhospitable. Conservatives have typically cited them as proof that the entire corporate code needs an overhaul—one that, in all likelihood, would involve lowering rates to make ours a bit more competitive with the rest of the world’s. But, frankly, it might not be worth getting too worked up over inversions, since at this point they’re still fairly rare, and it’s not 100 percent clear how they affect our economy.
Keep in mind that when they invert, companies like Pfizer are basically moving their official postal address and not a ton more; it’s not as if Pfizer is uprooting all of its factories and R&D and moving them to Dublin, too. As Matt Gardner, executive director of the Institute on Taxation and Economic Policy, put it earlier this month, “An inversion by Pfizer would very likely amount to pretending to be Irish, much like the Notre Dame mascot.” The merger will probably deal a slight blow to U.S. gross domestic product, since the profits from inverted companies earn aren’t counted toward our national accounts. But that’s not exactly crushing, since at least some of the money will probably get sent back to U.S. investors in the form of dividends. As for taxes, well, Congress’ number-crunchers think inversions will cost the U.S. Treasury about $41 billion over 10 years. However, some recent research out of Northwestern’s Kellogg School of Management suggests that might be off—and that, weirdly enough, inversions might actually increase American tax collections by allowing companies to bring money they were previously hoarding overseas back to their U.S. operations and hand it out to shareholders.
Economic implications aside, Pfizer’s move can still be interpreted as a bit of a middle finger to the Treasury Department, which just last week announced a new set of rules specifically designed to discourage inversions. Sorry Jack Lew. Big pharma, it seems, don’t care.