Pharmaceutical companies are in the business of finding cures for things that ail us. Last week, Pfizer and Allergan found a surprisingly effective cure for paying taxes. Pfizer merged with fellow pharma giant Allergan to become the largest pharmaceutical company in the world, headquartered for tax reasons in Dublin, but operationally based in the US, where much of the merged company’s activity takes place.
The deal is worth around €150 billion. To give you a sense of scale, the entire output of the Irish economy in 2014 was €162 billion. The vehicle for this bait and switch is the US tax code’s allowance for ‘inversions’, where one company buys another and can transfer its tax liability to the merged entity’s corporate headquarters, paying taxes at a much lower rate than before.
In the US, the corporate tax rate is 35 per cent. In Ireland, it is 12.5 per cent. The US tax code insists US companies pay US corporate income tax on what they make across the globe, and not just those profits earned in the US.
But the 35 per cent headline rate is only a headline. In practice, companies like Pfizer pay closer to 8 per cent of their incomes in taxes in the US, thanks to a very, very business-friendly tax code there. Presumably, multinationals wouldn’t be using the inversion process to move to Allergan’s Dublin headquarters unless they thought they could pay a good deal less using deferred foreign earnings as offsetting quantities.
It is important to mention that nothing about Ireland allows this to happen. We are the (slight) beneficiary of US tax policy in this regard, because of our own tax structure. What is happening is morally wrong, and we do benefit from this, but without the US tax code, inversions would not be a reality. The US Congress, an institution so corrupted by corporate control that it can’t legislate to stop children shooting each other, is not in a position to stop inversions. Readers interested in just how compromised the US political system is should read Robert Kaiser’s So Much Damn Money.
We can forget about the US solving this problem in the next five years.
The real winners in this are, of course, the advisers: economists, accountants, sundry tax specialists, consultants and other associated billable hours merchants. They must feel like they’ve died and gone to fat-fee heaven. Thanksgiving has come early for these lads. Sorry, not Thanksgiving: Thanksgiving’s culturally appropriate Irish analogue – Begorrah.
The losers are the US government, US drug lobbyists who lived large bending the system to the will of companies like Pfizer and Allergan, and Ireland’s international reputation. The US economy is the largest market for pharmaceuticals, and the place where these companies have created their products in the past. Without the US government, much of the innovations these guys now appropriate as profit wouldn’t even exist. But more on that in a minute.
For Ireland, the more this kind of stuff happens, the more we get tarred with the brush that we are a tax haven, a ‘dodgy foreign locale’, as one US politician publicly described us. And we are, in the sense that we facilitate companies the size of countries saving money at the expense of US taxpayers, whose income taxes will have to go up to fund the social services Pfizer employees in the US will continue to enjoy.
The Irish taxpayer will not benefit from the inversion process at all.
Pfizer’s rationale for trying to save this money, by some estimates $21 billion or so, is that it will spend the money on research and development. They seem to be saying the choice is taxes or innovation. In fact the premise is false. We now know much of the interaction of public and private research acts as a ‘crowding in’ device rather than crowding the private sector out.
The state, via its fiscal policies – paid for using taxes – allows the development of technologies and processes which can deeply alter the structure of our economies. The private sector develops these technologies and develops the markets through which they are diffused to the population.
Pfizer and Allergan are not alone in their efforts to hoard money overseas and avoid taxes. The Berkeley economist Gabriel Zucman, in his excellent Hidden Wealth of Nations – which shows how large corporations and rich individuals move their wealth – estimates that 8 per cent of the world’s financial wealth is held offshore. That’s around $7.6 trillion, costing at least $190 billion in lost tax revenues. You’d build a lot of hospitals for $190 billion.
Zucman estimates that more than half of the foreign profits of US firms are booked in tax havens and, unfortunately for our reputation, a lot of those foreign profits head through Ireland. Zucman makes the case for a world financial register, which would solve the problem by removing the ability of firms to declare the relevant financial security holdings, and this can be verified by a national tax authority. The promise of the transatlantic trade partnership to help regulatory authorities figure out who owes what can’t be underestimated.
If inversions are the cure, you have to ask what the disease is. Why do multinationals arbitrage between jurisdictions? The answer is simply because they can. Morally this is wrong, but hand-wringing won’t solve this problem: internationally coordinated policies will.
Right now, the reputational downside risk for Ireland is far greater than the fiscal upside risk, so for us inversions are nothing more than a headache. Luckily, we now host people who have a pill for that.