The headlines covering Pfizer and Allergan’s $160 billion merger deal evolved quickly on Monday: In the morning, they relayed an image of a blockbuster merger that will produce the world’s biggest pharmaceutical company. By the afternoon, the story was a grim picture of a U.S. corporation dodging taxes by seeking refuge on Irish shores.
In a press release announcing the merger on Monday, Brent Saunders, the CEO of Allergan, called the merger “highly strategic.” Pfizer is taxed at around 26 percent in the U.S., while Ireland has the second lowest corporate income-tax rate (behind Switzerland). So, in the financial highlights of the deal, Pfizer noted that the merger will save $2 billion over the first three years—partly due to a lower corporate tax rate of 17 to 18 percent when the company moves its headquarters to Dublin, where Allergan is based.
The math is easy, but the ethics are blurry. This process, called a “corporate inversion,” is when a U.S. company merges with a foreign one to become foreign-owned on paper while its operations and business remain in the U.S. While the companies that participate in inversions often claim it makes their business logistics more efficient, inversions have a curiously consistent habit of reducing companies’ tax bills.
There’s some evidence that the practice is becoming more popular. Last year, the Treasury announced that it was taking action. In order to make inversions less enticing from a tax-reduction standpoint, the Treasury added new requirements regarding ownership percentage and closed a loophole that allowed companies to avoid U.S. taxes. Earlier this month, the Treasury issued additional actions related to those last year. (These changes have already gone into effect.)
The Pfizer-Allergan deal has reignited arguments over the unfairness of dodging taxes and the need for corporate tax reform. John Cassidy at The New Yorker called the deal “a disgrace,” seeing as Pfizer has benefited from U.S. taxpayer-funded research and the talent of American scientists. Democratic and Republican presidential candidates slammed the deal yesterday, and senators and house representatives called for tax reform. On the other hand, the Bloomberg View editorial board found fault not with the companies but with the tax code that allowed their merger. Can a company be blamed for maximizing shareholder returns through global-tax sleight-of-hand when the law so clearly allows them to do so?
While this particular deal is unlikely to be blocked—it probably won’t qualify as an inversion under the Treasury’s new rules—it has people talking more seriously about how to make inversions less appealing. Some are saying that the corporate tax rate should be lowered so companies choose to stay in the U.S.; others are calling for a wholesale revision of corporate taxation.
For Pfizer, which made over $9 billion in profit in 2014, the equation to move abroad makes sense. But after all the backlash over this merger, executives are now saying they’re considering splitting up the companies again in a couple years.