Thursday, April 07, 2016


I'm glad to see that the Pfizer-Allergan deal has apparently fallen apart.  It probably wasn't a great deal from a business standpoint, especially for the Pfizer shareholders who may have been over-paying.  (Pfizer stock apparently rose when the deal collapsed - Allergan stock first fell a lot, then rebounded a little.)

What were the tax advantages that Pfizer hoped to garner from the deal?  Presumably some of it related to greater ease of earnings-stripping out of the U.S., which U.S. taxpayers would have no reason to welcome.  But as discussed here, Robert Willens suggests that enhancement of Pfizer's ability to access some $140 billion in foreign earnings, tax-free, for loans among its affiliated companies was "100 percent the reason behind this deal."

That complicates the normative story a bit since, insofar as Pfizer would merely be incurring deadweight loss from more complicated financing arrangements and internal fund flows, rather than paying an extra $35 billion in U.S. tax (as suggested by the Americans for Tax Fairness, a progressive advocacy group, based on assuming massive repatriations in any event).  The U.S. doesn't benefit directly from the deadweight loss, although the prospect of incurring it can potentially reduce profit-shifting incentives ex ante.  But large-scale, fully taxable repatriations do happen sometimes (GE is a recent example).  We may get to see, in the next few years, just how much U.S. tax (if any) Pfizer decides to incur via taxable repatriations, if it can't conjure up an alternative inversion deal.

Treasury's success in blocking this particular inversion plan is just one micro-episode in a very long battle.  Whatever regulatory or statutory rules impeding inversions one might like (or not like) to see adopted, including those just-issued that torpedoed the deal, it's important to address more directly the underlying incentives that induce U.S. companies to seek to invert.  Here I think two main things should be done:

1) Imposing a deemed repatriation of U.S. companies' foreign earnings or "permanently reinvested earnings," to lower the outstanding "loan balances" on deferred U.S. taxes.  This just buys time before addressing deferral more permanently, but the balances have gotten so high that it strikes me as an important interim step.  There's certainly room for legislative negotiation over the terms of the deemed repatriation.

2) Re-balance U.S. rules that address profit-shifting out of the U.S. domestic tax base, so that they rely relatively more on approaches that affect foreign as well as domestic multinationals, and relatively less on approaches that only hit U.S. companies (i.e., via our CFC rules).  The rules should probably also be tougher overall, but that's distinct from the re-balancing point.

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