FOR ALL the attention it's gotten, the anticipated merger between Pfizer Inc., the New York-based pharmaceutical giant, and its British rival AstraZeneca is far from a done deal. Pfizer has yet to make a formal offer, as its CEO told a parliamentary hearing last week; it has only broached informal proposals that AstraZeneca has so far rebuffed.
But if the merger does go through, Pfizer makes no bones about its intention to shift the company's legal domicile to the United Kingdom, thereby saving a fortune in taxes. As a US business, Pfizer's foreign earnings are subject to a combined 42.1 percent corporate tax rate — the 35 percent federal rate plus New York's 7.1 percent. As a British company, its top tax rate would fall to 21 percent. The difference could amount to $1.4 billion a year.
Outrageous? Indeed. But the outrage isn't the wish of an American corporation to lower its tax bill. It is a US tax code so punitive and counterproductive that it can drive a company like Pfizer, which was launched in Brooklyn in 1849, to turn itself into a foreign corporation.
The United States has the highest corporate tax rate in the developed world. That puts American companies at a serious competitive disadvantage, since their rivals elsewhere are able to channel more of their profits into new investment, hiring, and productivity. What's worse, ours is the only country that enforces a system of "worldwide" taxation, which means that American firms have to pay tax to the IRS not only on income earned in the United States but on their foreign earnings as well. Other nations content themselves with "territorial" taxation — they only tax income earned within their national borders. US corporations like Pfizer that have significant earnings overseas are thus taxed on those earnings twice: first by the government of the country where the money was earned, and then by the IRS.
So why wouldn't "US Firms Pack Up for Tax Benefits," as a Wall Street Journal story on the trend was headlined? Relocating their corporate domicile to another country frees them from having to pay taxes to Uncle Sam on their foreign earnings — earnings that Uncle Sam shouldn't be taking a bite out of in the first place. If America's corporate tax system weren't so grasping — if it operated along the same territorial tax principles as the rest of the industrial world — businesses wouldn't be feeling pressure to head for the exits.
Pfizer is only the latest US firm to contemplate merger with a foreign company as an escape hatch from an onerous tax code. In just the past two years, reports Bloomberg, at least 15 publicly traded corporations have undertaken such a "tax inversion," as the practice is called. Among them: banana distributor Chiquita Brands, telecommunications company Liberty Global, and Eaton Corp., a Fortune 500 supplier of electrical equipment. In recent weeks, shareholders of Walgreen, the Illinois-based drugstore chain, have been pushing the company to reincorporate in Switzerland, where it is in the process of acquiring Alliance Boots, a health and beauty conglomerate.
Tax inversions are easy to rail against. A New York Times columnist labels the Pfizer-AstraZeneca proposal "a mega-tax-dodge." The liberal group Citizens for Tax Justice accuses Pfizer of wanting to "get out of paying their US taxes, and it's absolutely wrong."
But companies don't "get out of paying their US taxes" — that is, taxes on income earned in the US — by shifting their legal address. European and Asian companies that do business in America pay taxes in America. Inversion doesn't change that.
No taxpayer, individual or corporate, is obliged to pay more in taxes than the law requires. And where legal options exist for reducing one's tax bill, there is nothing wrong, let alone "absolutely wrong," in considering them. Corporations don't exist to maximize government revenue. Their loyalty should be to shareholders and customers — not the US Treasury.
It isn't carved in granite that America must have the most punitive corporate taxes in the world. Congress inflicted that burden on American business, and Congress has the power to lift it. "We should not be surprised," writes Senate Finance Committee Chairman Ron Wyden, an Oregon Democrat, "when corporations fight to get out from under antiquated tax rules."
Pfizer can't rewrite the tax code that is causing it to overpay $1.4 billion in yearly taxes. It can only try to escape it.
(Jeff Jacoby is a columnist for The Boston Globe).
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