Pfizer, one of the world’s largest pharmaceutical companies and more profitable companies, is attempting to permanently dodge tens of billions of dollars of U.S. taxes it currently owes through a merger with fellow drug firm Allergan, based in the tax haven of Ireland. While technically not a corporate inversion, this maneuver will provide Pfizer with the same tax advantages as one.
In effect, Pfizer will renounce its American identity, 166 years after being founded in New York City. The shift to Ireland will be largely a change of address to dodge U.S. taxes, as the combined company will still be primarily owned by Pfizer’s current shareholders and will continue to be directed and managed from Manhattan.
Pfizer’s maneuver, if successful, will be the culmination of many years of overseas tax avoidance that has reduced the company’s tax bill to a fraction of what it should be paying.
In addition to dodging its fair share of taxes, Pfizer—maker of Celebrex, Lipitor, Lyrica, and Viagra, among many other health-care products—has also been aggressively raising prescription drug prices, thereby straining patients and our health care system and in some cases putting needed medications out of reach.
By dodging taxes while boosting prescription drug prices, Pfizer squeezes American families and communities from two sides at once. In the company’s biggest insult to America yet, Pfizer’s merger will allow it to go on enjoying all the benefits of being based here—everything from a publicly educated workforce to an excellent communications infrastructure to a reliable patent system—without adequately paying to support them.
Following are this report’s key findings:
• Through its proposed Allergan merger, Pfizer would be able to permanently dodge an estimated $35 billion in U.S. taxes owed on about $148 billion in profits it currently maintains offshore. This figure is derived from two sources:
• Pfizer’s filings with the Securities and Exchange Commission (SEC) that it had $21.2 billion in cumulative deferred tax liability on unrepatriated foreign earnings in 2014; ATF estimated that meant Pfizer had an additional $74 billion in offshore profits that were not publicly reported.
• An estimate by Citizens for Tax Justice that Pfizer owes about $14 billion (allowing for foreign taxes already paid) on another $74 billion in Permanently Reinvested Earnings offshore that Pfizer has reported to the SEC.
• Pfizer’s tax dodge has a human cost. The estimated $35 billion in taxes Pfizer will dodge could, if collected fund the National Cancer Institute for almost seven years, provide high-quality preschool for all low- and moderate-income four-year olds for nearly five years, or provide free tuition for two years of community college for up to nine million students over five years.
• Pfizer has routinely hiked the prices of dozens of prescription drugs at 10 times or more the rate of inflation each year since 2012. Seven of Pfizer’s top selling drugs had their prices hiked an average of 39% over two years—from 2013 to 2015—under the Medicare program, four times the prescription drug inflation rate. Lipitor, Pfizer’s widely-prescribed cholesterol treatment, jumped 35% during that period. Pfizer’s nerve medication Lyrica spiked 77% between 2010 and 2014, under the same program.
• If Pfizer wants to be an Irish company to cut its taxes but still be based in America, then it should charge American patients the same much lower drug prices it charges Irish consumers. Pfizer charges 12 times as much on this side of the Atlantic under the Medicare program for the same seven top-selling drugs as it charges in Ireland.
• Pfizer also contributes to sky-high drug prices by suppressing cheap generic alternatives to its pricey brand-name drugs. It keeps generics off the market through repetitive patenting and lengthy litigation.
• While Americans suffer from lost tax revenue and high drug prices, Pfizer thrives. Over the last five years, Pfizer has had sales averaging more than $50 billion a year, with earnings averaging $9.4 billion for a robust profit margin of nearly 18%. Pfizer’s 2015 earnings margin of 18.8% is up nearly 50% since 2011.
• Pfizer got $5 billion in federal contracts over a recent five-year span. Even as the company avoids paying its rightful share of taxes to America, the U.S. is paying the company about a billion dollars a year for prescription drugs. Federal government contracts represent about 5% of the company’s total U.S. sales.
• Pfizer was fined $2.3 billion in 2009, including the biggest criminal fine up to that point in U.S. history, for promoting untested uses of a medication. In the nation’s largest health care fraud settlement at the time, Pfizer acknowledged illegally marketing a painkiller that was subsequently withdrawn over safety concerns. Pfizer has been fined and lost lawsuits over its drug marketing several other times in recent years.
• Taxpayers provided Pfizer with $591 million in tax breaks over the last five years through federal research and experimentation tax credits and domestic manufacturing tax deductions. This is a costly taxpayer subsidy to a company that is charging customers exorbitant prices.
• American taxpayers have spent up to $21 million over the last three years subsidizing huge paydays for Pfizer’s top executives. Because of a loophole for “performance pay,” Pfizer is able to write off unlimited amounts of executive pay despite a rule meant to bar tax deductions for excessive compensation.
• Recommendations for preventing Pfizer from dodging $35 billion in taxes and for preventing other corporate inversions. The Obama Administration should immediately take executive action to close the loophole that Pfizer will exploit with its merger to dodge $35 billion in taxes. The Treasury Department should revise its 2014 notice that prohibits “hopscotch loans,” which are used by inverted corporations to dodge U.S. taxes on offshore profits at the time of the inversion. The current notice prohibits such loans for any inverted U.S. company whose shareholders wind up with more than 60% of the new merged entity. The threshold should be lowered to 50%. Under Pfizer’s proposed merger, its shareholders will own 56% of the new foreign-parent company, enabling the company to exploit this loophole.
Congress should turn this proposed executive rule into law, and also deny inverted status to any U.S. company that is not at least 50% foreign-owned or that continues to be managed and controlled from the United States. Congress should also close the earnings stripping loophole that lets corporations shift taxable profits from the U.S. to low-tax countries, and impose an exit tax on offshore profits to ensure corporations pay what they owe before they desert America for a tax haven.