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Pfizer: Tax Havens or Bust!

Why cutting U.S. corporate taxes won’t stop a wave of offshore reincorporations.

May 1, 2014

Grand Cayman Island (Credit: NASA)

Pfizer, founded in the United States in 1849, is trying to buy AstraZeneca, one of its biggest global rivals. Reportedly, and quite bizarrely, the main purpose of this transaction is so it can reincorporate in the United Kingdom — and thus reduce its tax “burden” as well as access “trapped” overseas cash.

The United Kingdom, of course, makes for a much more “competitive” tax environment. After all, it provides corporations and rich individuals with access to half a dozen or so offshore tax evasion center crown dependencies and British Overseas Territories.

(And let’s not forget about that always-subservient financial center, a medieval holdover city-within-a-city in the heart of the modern British capital.)

Of course, we should refer here to the scheme as tax “avoidance,” because a tax maneuver is not “evasion” if it is entirely legal (thanks to a most circumspect exploitation of all the loopholes).

In Pfizer’s case, it is indeed so entirely legal — and potentially lucrative — for the company that Pfizer has already tried to buy a disinterested AstraZeneca once already this year alone. Undeterred, they have made a second massive offer this month.

United Kingdom or United States to blame?

All of these British tax avoidance centers exist in a legal gray area that has its true charms when it comes to sovereignty and expediency. They are outside UK control on paper when convenient — and therefore, with one exception, outside effective EU regulations, too. But they are very much under the UK’s thumb whenever so desired and needed.

Now add the U.S. side of the broader debate to this tax equation. Congressional Republicans are already telling everyone that the problem is that U.S. corporate tax rates are not low enough.

In reality, the United States tax code is trying (and failing) to compete with literal tropical islands for tax evaders that are nominally (but not really) outside of UK control. That is a losing battle.

The United States needs to put pressure on the UK to stop stealing revenue from the rest of the developed world, not lower its already effectively low corporate tax rate.

In terms of the effective corporate tax rate, the United States is actually below the average of the big industrial countries, at about 26%, while the advanced economies OECD’s 2012 GDP-weighted average was 32%. In many cases, major U.S. firms are consistently paying even less than that.

The reincorporation wave

And here is an eye-popping fact from The New York Times DealBook: “At least 50 American companies have completed mergers that allowed them to reincorporate in another country, and nearly half of those deals have taken place in the last two years.”

Put another way, that’s almost 25 tax avoidance deals in the past two years alone.

Again, that says little about the U.S. corporate tax structure. It hasn’t really changed much — and certainly not adversely to corporate America under a Republican House Majority. But it says everything about the total lack of civic pride American corporations have right now.

To put it mildly, the U.S. infrastructure is such that the U.S. government is not in any position to dispense with the tax revenues U.S. corporations ought to be paying to their home government.

True tax reform

What the Pfizer episode shows is that, contrary to the constant drumbeat of the U.S. Chamber of Commerce, the United States definitely does not need any tax reform in the form it is envisioned by Congressional Republicans or Wall Street Democrats.

The United States does not need to chop its tax code down to remain competitive with the Guernseys, Jerseys, the Isles of Man, Gibraltars, the Cayman Islands and the British Virgin Islands of this world.

The main goal has to be to reduce tax avoidance and loopholes, unnecessary corporate tax credits and subsidies, as well as other inconsistencies in the tax code that arbitrarily allow some industries pay less than others.

As a matter of fact, U.S. corporations — as profitable as they are — have taken their home nation for a nearly tax free ride for too long. The U.S. tradition of the rule of law that allowed business to flourish cannot be permitted to devolve into a “rule of loopholes” system that just barely stays inside the lines.

Tax avoidance is a cancer on democratic societies. It both undermines confidence in the fairness of the taxation system and erodes the government’s ability to invest in infrastructure and provides services. In the end, that reduces any government’s credibility with its people.

Without the U.S. government’s help, big American corporations would never have been so successful in the first place. We cannot let them get away with chipping away at the country’s tax base even further.

And the corporations should tread lightly for their own good. If such mergers as the one Pfizer proposes are the future of globalization, the American people will continue to feel very abused. Such schemes may eventually produce a backlash strong enough to erase any of the positives.


The US effective corporate tax rate is actually below the average of the big industrial countries.

There have been almost 25 U.S. tax avoidance mergers in 2 years. That is a serious lack of civic pride.

The United States should not chop its tax code down to remain competitive with the Cayman Islands.

Tax avoidance undermines confidence in the fairness of the taxation system and government’s ability to function.