Fixing America’s ‘inversion’ problem rests at home

It's not us, it's you. This should be the response to any political criticism directed Ireland's way as multinationals swap American head-office addresses for Irish ones in tax-saving mergers. The marriage of New York-based Pfizer and Dublin-based Allergan in a $160 billion (€151 billion) deal creates the world's largest drug maker in the biggest "corporate inversion" – a transaction that allows a US company to avail of Ireland's 12.5 per cent tax rate instead of America's 35 per cent corporate rate by reincorporating overseas.

In the absence of a divided Congress passing legislation that would overhaul a straggling tax system, US multinationals are bypassing the lawmakers and agreeing deals to shave billions off their tax bills.

Pfizer complained last month that America’s high taxes had left the company competing with “one hand tied behind our back,” and that it had unsuccessfully tried to lobby Congress on tax reform.

Republicans and Democrats alike recognise they have a problem and lay blame in part at their own door for failing to resolve it with comprehensive legislation, though it doesn't reflect well on Ireland that it is the destination of choice for unpopular US corporate match-making.

There is little finger-pointing at Ireland over inversions when Irish delegations visit Washington. Britain's possible exit from the European Union has been a greater concern. Pfizer chief executive Ian Read has called the merger "a great deal for America," but certain US politicians don't see it that way. Bernie Sanders, a socialist senator running for the Democratic presidential nomination, has called on the Obama administration to block the deal and on Congress "to pass real tax reform that demands that profitable corporations pay their fair share of taxes".

“The Pfizer-Allergan merger would be a disaster for American consumers who already pay the highest prices in the world for prescription drugs. It also would allow another major American corporation to hide its profits overseas,” said Mr Sanders.

Democratic congressman Sandy Levin, a long-time critic of inversions, said it highlights the need for Republicans to join Democrats in addressing the issue.

Tens of billions

“Tax-motivated corporate inversions have cost the US tens of billions of dollars, and place an increasing burden on American taxpayers,” said Mr Levin. “Historically, inverted companies maintain their key operations in the

United States

, which Pfizer is apparently doing, while reducing the taxes they pay here.”

President Barack Obama has accused US multinationals of being unpatriotic and "corporate deserters" for relocating their legal addresses and not much else overseas. Last year he criticised US firms for becoming "magically" Irish through takeovers.

He has gone further too, circumventing a dysfunctional Congress by imposing restrictions through the US Treasury Department that make it more difficult for US companies to execute inversions.

The structuring of the Pfizer-Allergan deal as a reverse merger with the smaller Allergan technically buying Pfizer – and taking 44 per cent of the combined company – is designed to skirt rules aimed at blocking inversions where US shareholders end up owning more than 60 per cent.

The more attractive percentages for the companies are on the tax side. Pfizer has said the effective tax rate the enlarged company will pay will be between 17 and 18 per cent after the deal closes, compared with the 26 per cent that Pfizer had to pay the American taxman in 2014.

White House spokesman Josh Earnest said yesterday Treasury was "rather limited" on what it can do administratively to stop further inversions. The real way to address the problem is through legislation and that is not going to happen any time before the country picks its next president and he or she takes over in January 2017.

The political noise around the tax implications of these deals means other aspects of the match-up, particularly as far as Ireland is concerned, are lost. Pfizer and Allergan have been operating in Ireland for more than four decades. Pfizer has said it has invested $7 billion in its Irish operations, including Grange Castle in Dublin and Little Island and Ringaskiddy in Cork, since 1969. The two companies employ a combined 5,000 employees in eight locations across the country.

The one location that counts to the US politicians is the head office and the loss of another corporation to a Dublin address hurts American patriotic pride, and its purse. Fixing the problem, though, rests at home.