Clinton plan would pump brakes on Pfizer-Allergan deal, other major inversion mergers
- Democratic presidential candidate Hillary Clinton on Wednesday unveiled her plan to halt corporate “inversions,” indicating she would press Congress to pass legislation setting a 50% threshold for foreign company ownership before an American firm can shift tax domiciles.
- Clinton called for the threshold to be retroactive to May 2014, which would abrogate the Pfizer-Allergan mega-merger. As the deal currently stands, shareholders of the Ireland-based Allergan would own 44% of the combined company.
- Furthermore, Clinton’s proposal included an ‘exit tax’ to be imposed on untaxed foreign earnings when a U.S. company decided to move overseas. Currently, U.S. firms can defer foreign earnings indefinitely and are not required to pay tax unless those earnings are repatriated to the U.S.
Clinton has joined a chorus of critics who argue businesses relocating abroad hurts the U.S. The tenor of this criticism has sharpened since the $160 billion Pfizer-Allergan merger was announced several weeks ago. The planned merger will allow Pfizer to switch its tax domicile to Ireland, thereby lowering its tax rate to around 18 percent. The U.S. corporate tax rate currently stands at 35%, although many firms pay a lower effective rate.
There is general bipartisan agreement over reducing the U.S. corporate tax to a more internationally competitive rate. The sticking point, however, has been the framework to introduce corporate tax reform. Obama has previously proposed lowering the overall corporate rate to 28% from 35%, while introducing this year a 19% tax on foreign profits earned abroad by U.S. firms.
In July, Senators Rob Portman (R-OH) and Chuck Schumer (D-NY) proposed a lighter tax on overseas profits regardless if the U.S. company brings it back from overseas or not. Majority Leader Mitch McConnell (R-KY), however, hopes to take up comprehensive tax reform after the presidential elections. All of the current Republican candidates for president have announced plans to cut the overall corporate tax rate.
Clinton also targeted the practice of ‘earnings stripping,’ which many firms use to move profits out of the U.S. If Congress did not pass her proposed legislation, Clinton would direct the Treasury Department to use any legal authority it had to limit the practice.
When a U.S. company acquires a foreign company, it will create a new foreign parent and loan money to the now U.S. subsidiary. The interest paid on that loan back to the foreign parent is tax deductible in the U.S., helping lower tax expense. The strengthened tax rules recently released by the Treasury did not go after earnings stripping, although the rules did make it harder to invert.
Clinton’s campaign claimed her plan would raise “at least $80 billion over the next decade,” money she wants to put into research, relief for slumping manufacturing regions, and supporting businesses moving jobs back into the U.S.
Follow Ned Pagliarulo on Twitter