Pfizer

Pfizer Inc. is an American global pharmaceutical corporation headquartered in New York City.

Joe: In several of our prior columns, we discussed corporate inversions. It's like a large corporation merging with a small corporation in a foreign country to change the address of the corporation and avoid U.S. corporate taxes. It would appear these columns have had an impact on the White House. Obama finally is criticizing companies that leave the U.S. for lower taxes. When these companies abandon the U.S., they still want U.S. patent and intellectual protection, rule of law, access to technology and American workers producing and marketing their drugs. His criticism comes with U.S. Treasury's new rules that are aimed at drugmaker Pfizer, which stood to escape U.S. taxes on more than $128 billion of profits stored abroad by acquiring an Ireland address.

Ken: Breaking news: According to the Wall Street Journal, the Pfizer board has voted to back out of the merger with Ireland based Allergan. One for Obama. The Treasury department rules for the complex calculations making tax-inversion deals pay off for Pfizer have been rewritten. Question: Do you hire an accountant to prepare your taxes and do you expect him to do whatever is legal to minimize your obligation?

Joe: Yes and yes. Tax evasion is illegal but tax avoidance is legal. Accountants and tax lawyers will love the Treasury decision. They now have to digest a mountain of new regulations for their corporate clients. Trying to sort through ambiguity will keep them busy for years. New regulations always are considered bad in the sense that they increase immensely the cost of doing business. But what is the president to do when Congress won't act to undertake massive tax reform reducing corporate taxes and closing loopholes?

Ken: That's easy to answer: Make Obama-law, perhaps unconstitutionally. For Pfizer, folding is more sensible than fighting. Although Obama makes tax "loopholes" sound illegal or at least unsavory, the loopholes have been created by acts of Congress. The mortgage interest deduction and the charitable gift deduction are loopholes.

Joe: Corporate greed has no bounds. Had the Pfizer deal gone through and ownership of the company changed, its CEO (according to Bloomberg) would have received a pay raise from about $23 million per year to $32.6 million. That wouldn't enter the CEO's mind as he was making a decision, would it? Never are these decisions made to pass on savings to the consumers in costs for a product or to increase employee wages down the line.

Ken: You have been listening to Bernie Sanders or reading Marx. Most Americans have some idea about our economic system, (regulated) free market capitalism and, supply and demand. Within a few blocks of Bourbonnais Village Hall there are about a dozen places to buy a burger or comparable fare, competing on taste, price, service, etc. Changing the IRS rules on an ad hoc basis to prevent a competitive business strategy by global Pfizer seems like a bold stroke for Obama.

1) Pfizer ownership would not change, only the address of the taxable entity. Pfizer is a public company with about 6 billion shares outstanding, total capitalization about $220 billion and after the merger the corporation would remain public. Shareholders, that greedy passel of pigs, are expecting the CEO and his team to steadily increase the value of their stake. Because companies compete in the market for executive talent, the money benefits for the Pfizer CEO are not inconsistent for an organization with sales of $50 billion. Likewise, there is a competitive market for labor of all sorts.

2) Government entities also compete in a sense. A country with a repressive regime such as Cuba has residents decamping for greener grass. A state such as Illinois with high taxes and beau coup unsolved financial issues has a flood of residents, many retirees, relocating to Texas or Florida. In the sphere of big business, it only makes sense for a company to weigh the taxing circumstances and possibly exercise the tax inversion option.

3) Lastly, big pharmaceuticals are a special case. Much of the business is not in a competitive market, but rather a monopoly on sales of individual drugs protected by U.S. government patents. It is said the patent system enables company investment in research and development, developing new drugs.

Joe: To the shareholders, which you describe as the greedy passel of pigs of Pfizer, much of what you are laying out is hogwash. The merger had no economic value (research and development, future strategy, etc.) for the company beyond reducing taxes. All Pfizer was getting was a tax dodge. All of this is evident by the fact they backed out of the merger. Any CEO who uses tax avoidance as the main driver to merge, needs his head examined. Further, now Pfizer has to pay a breakup fee of $150 million to Allergan. The pigs need to rebel, dump their CEO and ask for his resignation.

Ken: Pfizer financial documents are readily available online. Back of an envelope math: Pfizer's U.S. corporate tax on $9 billion pretax earnings was about $2 billion last year. Ireland rate being 12.5 percent or one third of U.S., then Ireland tax would be $600 million creating direct to bottom line savings $1.4 billion per year. Of course, the real calculations for Pfizer's global operations would be far more complex, but increasing the bottom line by 15 percent or so would be an incentive to pursue the inversion proposition. Because earnings from abroad are not taxed until they are "repatriated," after inversion Pfizer could bring home the money earned abroad untaxed to invest and for research and development. It is arguable that the money scarfed up by the federal government is put to more noble use than that left in corporate hands.

Joe Yurgine is a practicing attorney in Kankakee County. He can be reached at joeyurgine@yahoo.com.

Dr. Ken Johnston has been an ENT surgeon in Kankakee since 1976. He has been on several community boards and has been involved with clubs and organizations. He has lived in Bourbonnais since 1981. You can reach him at Ken_Johnston@comcast.net.