One of the world’s largest pharmaceutical companies has agreed a $155billion merger deal that will see its corporate tax rate slashed, making use of a process commonly known as tax inversion. American company Pfizer announced the huge deal with Dublin based Allergan, which will enable them to change their domicile to Ireland and take advantage of a tax rate of just 12.5%, giving them a multi-billion dollar tax cut.
Pfizer are currently placed second only to Johnson & Johnson on Forbes’ list of the biggest drug and biotech companies in 2015, based on revenues, profits, assets and market value. The merger will see them now become the biggest drug maker in the world based on sales, with a combined revenue of over $60billion dollars last year. The company will continue to mainly operate from its headquarters in New York, whilst enjoying the benefits of having legal status in Ireland.
The United States has one of the highest corporate tax rates in the world at 39.1% – albeit with an effective rate of about 27.9% after deductions and exclusions, according to the World Bank – so the temptation for companies to move overseas is not exactly surprising. Barack Obama tried to address the problem last year, making some revisions to the tax code and saying, about these corporations: “They’re technically renouncing their U.S. citizenship, they’re declaring their base someplace else even though most of their operations are here. You know some people are calling these companies ‘corporate deserters’.” However, these strong words and changes to the tax code have not seemed to have the desired effect, with the Pfizer/Allergan merger the latest of a number of instances this year.
The merger does still need to survive regulatory and anti-trust checks, but it is thought unlikely that these will bring the deal down. According to the Financial Times, “In an attempt to circumvent any political attempt to torpedo the deal, the transaction will be structured as a reverse merger, with Allergan technically buying Pfizer. Allergen will be renamed Pfizer and the new company will continue to be traded on the New York Stock Exchange.”
