Ian Read, Chairman and CEO of Pfizer Inc. (PFE), published an Op-Ed in the Wall Street Journal Wednesday, in which he defended the logical and ethical basis of his company's scrapped merger with Irish-based Allergan PLC (AGN). Read said that Pfizer invests heavily in the U.S. through research and development spending and by employing Americans, but said that a "broken tax system" puts the company at a significant disadvantage to its foreign-based peers. 

The proposed merger would have constituted a corporate inversion, a controversial and increasingly common strategy in which a company merges with one based in a lower-tax jurisdiction, moving its headquarters in order to reduce its tax burden. The Treasury effectively prevented the Pfizer-Allergan deal with new rules announced Monday. (See also, How Allergan PLC Makes Money.)

In his Op-Ed, Read wrote that Pfizer employs over 30,000 people in the U.S. and invests much of its $8 billion annual research and development budget in the U.S. He acknowledges the benefits that being based in the U.S. provides, including quality academic institutions and a skilled labor force, but counters, "so do our foreign competitors. And they pay significantly less for the privilege." He writes that these foreign competitors often pay 70 to 75 cents on every dollar Pfizer pays for research and jobs, due to taxes. (See also, Burger King and Tim Hortons Form Restaurant Brands International.)

For this reason, he says that the merger with Allergan was planned "in good faith" and was "driven by strong commercial and industrial logic." He adds, "no one was shirking their U.S. tax bills," as Pfizer would have continued to pay taxes on income made in the country. He called the Treasury's new rules "ad hoc and arbitrary," saying they were motivated by "political dogma" and "applied retroactively." 

Read quotes Treasury Secretary Jack Lew, who said in 2014, "we do not believe we have the authority to address this inversion question through administrative action. If we did, we would be doing more. That’s why legislation is needed." (The full quote, which Lew said in an interview with Jim Cramer in July 2014, is: "We have looked at the tax code. There are a lot of obscure provisions that we do not believe we have the authority to address this inversion question…" There is arguably more ambiguity in the original about what, if anything, can be accomplished without legislation.)

Read concludes, "To be pilloried as 'deserters' when we are trying to stay competitive on a global stage so that we can continue to invest in the U.S. is wrongheaded."

Is He Right?

His contention that the American tax system is "broken" will encounter little resistance on either side of the aisle, but the way to solve the problem of inversions is a subject of intense debate between and within both parties. Wall Street skeptics among the Democrats, such as Bernie Sanders and Elizabeth Warren, tend to cast the strategy as a symptom of corporate greed – "nothing less than a tax scam," in Senator Sanders' words – while most Republicans argue that the problem is the U.S.'s high corporate tax rate (the top marginal federal rate is 35%, one of the highest among rich countries, though most companies pay far less in practice).

On the other hand, Read's argument that going through with the Allergan deal would allow Pfizer to increase its investment in the U.S. assumes that taxes paid in the U.S. do not constitute investment. While many would agree with that assessment, Read does not address the assumption behind his argument, and so has left a number of readers scratching their heads. He does defend his case that moving abroad allows Pfizer to remain competitive, though, which in turn enables investment in the U.S.

Treasury Rule Explained

The new Treasury rules that caused Pfizer to call off the Allergan merger require the government to disregard the past three years of mergers involving U.S. companies when considering the portion of the company that U.S. investors own. Under the old rules, the result of Pfizer and Allergan's merger would have resulted in a 56% American-owned company, which is below the 60% threshold that triggers tax restrictions. Because Allergan is itself the result of prior inversions, the new rules put a combined Pfizer-Allergan above 60% American ownership and defeated the tax-saving purpose.

The Bottom Line

Pfizer's CEO Ian Read argues in a recent op-ed that his company's pursuit of an inversion with Allergan, which would move the company's tax base to Ireland, was not a way to shirk responsibility, but a sensible response to a "broken" tax system. He says that his company invests heavily in the U.S. and would like to continue to do so, but that heavy corporate taxes make that goal difficult. He defends his case that it is difficult to stay competitive when foreign rivals pay far less tax, but his contention that the rules prevent Pfizer from investing in the U.S. rest on the unstated premise that taxes paid to the government are not investments in the country.

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