Is Pfizer spinning its tax rate to justify a domicile-shifting merger with Allergan?
- According to Pfizer, the company's global tax rate was 25.5% in 2014, which puts it at a major disadvantage compared with foreign companies. But if it had reported its foreign earnings like many other U.S. corporations, its tax rate would actually be just 7.5%, according to the Wall Street Journal.
- Pfizer is unhappy with a tax rate that it considers too high, and is therefore seeking an inversion merger with a company with foreign headquarters. Currently, it is looking at striking a mega-deal with Dublin-based Allergan.
- More than 2/3 of the company's 2014 tax expenses ($2.2 billion out of $3.1 billion) will be paid when Pfizer chooses to repatriate those profits.
The concept of an effective tax rate is a useful smokescreen for accounting practices that allow companies to defer tax liabilities. For example, companies that can't or don't want to declare their offshore profits can permanently or indefinitely reinvest abroad and report a deferred tax expense.
Pfizer seems to use this accounting tactic more than other large multinational companies. For example, Pfizer has $74 billion in indefinitely reinvested earnings and $21 billion deferred liability. By contrast, Merck has $60 billion in indefinitely reinvested earnings and $2 billion deferred liability, while Bristol-Myers Squibb has $24 billion in indefinitely reinvested earnings and no deferred liability.
While this approach can be useful in terms of not having to pay taxes immediately, it also prevents companies from passing on profits in the form of dividends to shareholders. If Pfizer is successful in its bid to merge with Allergan, it may very well be forced to change its accounting practices.