Pfizer Merger Shows Need for U.S. Tax Changes, Lawmaker Says

  • House panel leader says taxes forcing companies to go overseas
  • Pfizer plans to move tax address to Ireland in Allergan deal

Inside Pfizer, Allergan's Record $160B Deal

Pfizer Inc.’s plan to merge with Ireland-based Allergan Plc shows the “critical and urgent need” to overhaul U.S. taxes, the Republican chairman of the House subcommittee that oversees tax policy said Tuesday.

The U.S. is “forcing companies to relocate to countries with more business-friendly tax regimes,” Louisiana Representative Charles Boustany, who leads the House Ways and Means subcommittee, said during a hearing in Washington. “This is not the first, nor will it be the last foreign acquisition pushed over the line by the U.S. tax code.”

“This must be a Congress of action regarding tax reform,” Boustany said.

Pfizer announced Nov. 23 it would move its tax address to Ireland as part of a $160 billion combination with Allergan. The deal would be the largest so-called corporate inversion, in which U.S. companies use a merger to take a foreign address and cut their tax rates. Dublin-based Allergan is buying the much larger New York-based Pfizer, and the new company -- with products including Viagra and Botox -- will be able to take advantage of Ireland’s 12.5 percent company tax rate. The U.S. rate is 35 percent.

The Ways and Means subcommittee’s top Democrat, Richard Neal of Massachusetts, agreed that the Pfizer announcement shows “Congress must take action immediately to stop the flow of inversions.”

‘Economic Patriotism’

“With this merger, the U.S. tax base continues to erode,” Neal said during the hearing. “Our rudimentary tax code remains ill-equipped to handle our increasingly globalized and digital economy.”

He called for lowering the corporate rate “in a revenue-neutral way as the Obama administration has proposed.”

President Barack Obama in 2014 questioned the “economic patriotism” of companies that engage in inversions. Congressional Democrats have unsuccessfully sought legislation to crack down since the latest wave began in 2012 by companies including Burger King Worldwide Inc., Medtronic Inc. and Mylan Inc. Republicans have resisted, arguing that a broader revamp of the tax code should take priority, though Congress hasn’t made progress on a wider overhaul.

Treasury Guidance

The Treasury Department has increasingly targeted inversions, most recently announcing new guidance on how it will value assets owned by U.S. companies that undertake inversions. The U.S. has the highest tax rate for businesses in the world and is one of the only countries to tax profits wherever they are earned. Previous moves by the U.S. Treasury derailed other proposed inversions, including AbbVie Inc.’s plan to buy Ireland’s Shire Plc for an estimated $52 billion.

Ken Frazier, chief executive officer of Merck & Co., said Tuesday on Bloomberg Television, “the U.S. tax system is frankly not competitive, in a global sense.”

The Pfizer deal “should be something that serves notice to our policy makers that good American companies feel no choice but to do something like tax inversions to remain competitive globally,” Frazier said. Merck is based in Kenilworth, New Jersey.

Reduce Inversions

A Treasury official told members of the Ways and Means subcommittee on tax policy Tuesday that Congress doesn’t have to wait for proposals to overhaul the entire U.S. tax system to “greatly” reduce the number of corporate inversions.

Robert Stack, the department’s deputy assistant secretary for international tax affairs, reiterated a prior Obama administration proposal to force inverted companies to keep their tax address in this country if the former U.S. company’s shareholders own more than 50 percent of the combined business. Under current law, a company that has undergone an inversion is still treated as domestic for tax purposes only if the U.S. company’s shareholders own more than 80 percent of the merged business.

“I believe that this would act very strongly to stem the tide of inversions, because companies are quite reluctant to give up control entirely,” Stack said in response to questions from the panel.

A group of House Democrats led by Sander Levin of Michigan, the top Democrat on the House Ways and Means committee, have introduced a similar proposal. Their plan would also bar American companies from inverting if they are managed, controlled and conduct significant business in the U.S.

Representative Mike Kelly, a Pennsylvania Republican on the tax policy subcommittee, criticized the measure during the Tuesday hearing.

“It doesn’t make sense that a bigger stick swung harder will encourage people to stay,” Kelly said. It makes much more sense “when we actually encourage people to make investments here,” he said.

Before it's here, it's on the Bloomberg Terminal.