Pfizer’s Inversion: Cui bono?

It looks like Pfizer has found a dance partner and that the inversion with Allergan is set to go through.  So who is set to gain from this?

The big advantage for Pfizer is that it is no longer subject to the US corporate income tax of 35 per cent on its worldwide profits.  The US is unusual in that it requires US companies to pay US corporate income tax on their global profits and not just those profits earned in the US.  As the US has the highest corporate income tax rate in the OECD this means that US companies will have to pay additional tax to the US government to bring the overall tax paid on their profits up to the US 35% rate. 

Of course, as lots of companies can engineer a deferral of this tax payment until the profit is formally repatriated to the US, many US companies choose to keep profits "offshore" rather than repatriate them and pay the additional tax due.  This hinders what the company can do with the profits such as transferring to the parent to invest in R&D or to distribute to shareholders. 

Ireland is also in the bracket of unusual countries in that we too have a worldwide regime - but in this instance at one of the lowest corporate income tax rates in the OECD.  This means that Irish companies have to pay very little additional tax on their non-Irish profits as they will already have paid sufficient tax in the countries they earn the profit to bring them up to (and over) the 12.5% rate.  By becoming headquartered in Ireland this is the position Pfizer hopes to move to. They will continue pay tax at the appropriate rates in the countries they operate it, but now won't have to pay additional tax when they aggregate the profit in the company’s HQ unlike they would have to do if the HQ remained in the US.

This won't change hugely the amount of tax that Pfizer pays – though it will change the amount of tax that it owes.  Up to now Pfizer has owed US corporate income tax on its non-US profits but can defer the actual payment of most of it using various provisions in the US tax code.  But it is by doing this that Pfizer faces restrictions on what it can do with its profits.  The inversion will have no impact on most of the countries Pfizer operates in (UK, Germany, France etc.) and the company will continue to pay corporate income tax on the profits it earns in those countries at the rates those countries levy.  The move will also have little impact on the amount of Corporation Tax the company will pay in Ireland.

By becoming Irish-headquartered all of Pfizer's global profits will become subject to Ireland's Corporation Tax and not just the profits it earns from  its existing activities here.  However, as the tax paid in the countries where these profits are earned is likely to exceed our 12.5% rate the amount of additional tax that will be due in Ireland will be nil.

There are almost no benefits to Ireland from these inversions.  There are likely to be further distortions to our national accounts and if the switch to becoming Irish-headquartered causes Irish GNP to be higher we could potentially face a higher bill for our contribution to the EU.  So if anything it could cost us.

The benefits are for the company that escapes the clutches of the US 35% corporate income tax rate on its profits earned outside the US though Pfizer will continue to be subject to the US 35% rate on the profit it earns in the US. 

Of course, once the structure is in place this will impact on future decisions of the company so the amount to be taxable in various jurisdictions may be different to what it would be had the inversion not taken place.

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