If approved, the prospective $160 billion (€151 billion) merger of Pfizer and Allergan will create one of the world's biggest pharmaceutical companies – and it will be based in Ireland. The deal would see US company Pfizer moving its tax domicile to the Republic where Allergan, a former American company, is already domiciled. Pfizer's main objective is to cut its US tax bill by benefiting from Ireland's low (12.5 per cent) corporate tax rate. Tax revenues to the Exchequer would be boosted if Pfizer channels more of its international income through Ireland.
This exercise in financial engineering – known as a tax inversion – is a form of tax avoidance increasingly favoured by US multinational companies; whereby they merge with a foreign company in a low tax jurisdiction and reincorporate there. This reflects their frustration with the US tax code where a 35 per cent rate of corporate tax rate is the highest in the developed world and where, unlike most others countries, tax is also payable on worldwide income. As more companies move offshore and large tax revenues are lost to the US exchequer, tax inversions have become increasingly controversial.
The Pfizer/Allergan deal is the biggest inversion to date and has provoked a strong reaction. Hillary Clinton, the frontrunner for the Democratic presidential nomination, accused Pfizer of using legal loopholes to avoid paying its “fair share” of US income taxes. Donald Trump, a Republican contender, described the deal as “disgusting”. President Obama has characterised inversions as “unpatriotic”.
However, the legal loopholes are of America’s own making. Its high corporate tax rate makes US companies less competitive and encourages some to relocate abroad. The obvious reform – for the US to cut its corporate tax rate – is one that it refuses to adopt because a divided Congress cannot agree how to do so. The move would require Democrats and Republicans to firstly reach an accord on scrapping tax loopholes and exemptions to ensure a lower corporate tax rate is revenue neutral and does not increase the budget deficit. As the US enters a presidential election year, that has become even more unlikely to happen.
The Pfizer/Allergan deal is significant, if inopportune, because it revives US criticism that Ireland encourages tax avoidance. The two companies employ more than 4,700 people here and Pfizer chairman and chief executive Ian Reid regards the development as “great for Ireland”. But exactly how great will not be apparent for some time as the new entity rationalises operations. Finance Minister Michael Noonan, though welcoming the development, has made clear that tax inversion is a matter for individual companies and not something IDA Ireland promotes. He noted that Ireland’s interest was to ensure no employment was lost and that jobs were actually created.