Pfizer merger stokes calls for congressional crackdown

A planned merger between pharmaceutical giants Pfizer and Allergan is prompting fresh calls for congressional action to prevent companies from shielding themselves from U.S. taxes by reincorporating overseas.

But an agreement on legislation curbing so-called inversions will be no easy feat in the midst of an increasingly contentious election cycle.

The $160 billion deal announced would be the largest-ever corporate inversion — a transaction by which an American company merges with a foreign company and then reincorporates overseas to reduce its tax burden.

Members of Congress from both sides of the aisle, Democratic presidential candidates and the White House have all responded to news of the planned merger by calling for legislation to clamp down on inversions.

Republicans, who control both chambers, largely favor a major overhaul that includes lower corporate tax rates that would reduce incentives for firms to move overseas in the first place.

“So let’s stop the political hand-wringing and get to work creating a U.S. tax code that’s built for growth,” said new House Ways and Means Committee Chairman Kevin Brady (R-Texas). 

White House press secretary Josh Earnest, meanwhile, said it was Republicans to blame for blocking legislation on inversions.

“That’s what you get when you have companies that have essentially bought and paid for members of Congress.”

That branch of sniping underscores the tough road ahead for any push to address the practice, even as the political pressure mounts in Washington.

“I just don’t see them doing anything on [inversions] this year,” said Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center.

With Congress in Washington only a few more days before the end of the year, it’s unlikely that Congress will do anything on the tax front other than renew expired tax provisions, he said.

A former tax aide said it would be unlikely for inversion-related legislation to pass before the 2016 presidential and congressional elections.

The Pfizer announcement is “another straw in the camel’s back for doing tax reform, but it’s not the straw that breaks the camel’s back,” the former aide said. He added that he doesn’t think there’s a position on which congressional Republicans and the Obama administration agree.

Lisa Zarlenga, co-chair of Steptoe & Johnson’s tax group, said while there is consensus that lower tax rates would reduce the incentive for companies to invert, “the bigger policy questions that Congress is being asked to grapple with are (a) what are the consequences of inversions to the economy and the federal government, (b) what are the best ways to limit any adverse consequences, and (c) will continued transactions of this nature translate into greater urgency for the Congress and the administration to begin serious discussions about tax reform?”

Some lawmakers are focused on rate-lowering tax reform as the solution to stopping inversions.

Rep. Pat Tiberi (R-Ohio), the chairman of the Ways and Means health subcommittee, said that “other nations have restructured their tax code to make themselves more attractive to multinational corporations, and we must do the same so American businesses can compete on a level playing field.”

Senate Finance Committee Ranking Member Ron Wyden (D-Ore.) said that comprehensive tax reform is the only solution to stopping companies from moving their headquarters overseas for tax purposes.

“The fact is, our tax code and our economy work as an ecosystem, so when Congress or the administration make changes in one area to solve an immediate crisis like inversions, there’s always a risk of unforeseen effects popping up somewhere else,” he said. “That’s a big reason why it is so difficult to address tax problems one at a time.”

Other members of Congress, however, are open to passing legislation that would address inversions outside the context of tax reform.

Earlier this year, Reps. Sander Levin (D-Mich.) and Lloyd Doggett (D-Texas) and
Sens. Dick Durbin (D-Ill.) and Sen. Jack Reed (D-R.I.) introduced legislation that would tighten restrictions on inversions. The legislation is similar to measures that President Obama put forth in recent budget proposals.

Senate Finance Committee Chairman Orrin Hatch (R-Utah) said that “short of a tax overhaul that will make it easier for American companies to invest and create more jobs at home, Washington ought to work together to explore viable policy-driven, apolitical solutions that will effectively combat inversions.”

Meanwhile, Democratic presidential candidates are calling for corporate tax changes that would make sure that companies pay their “fair share” of taxes. These comments come after Sen. Elizabeth Warren (D-Mass.) said last week that corporate tax reform should result in a permanent increase in the share of long-term revenues paid by large corporations.

After the Pfizer-Allergan merger is closed, the combined company is expected to keep Allergan’s Irish legal residence. The merged company is expected to have an adjusted effective tax rate of 17 to 18 percent in the first full year after the transaction is closed, compared with Pfizer’s expected 25 percent effective tax rate for 2015, according to a Pfizer spokesman.

Pfizer and Allergan expect to complete the merger in the second half of 2016. The transaction is subject to regulatory approval in the U.S and the European Union, according to a news release.

The merger was announced just days after the Treasury Department issued new guidance aimed at stopping and reducing the tax benefits of inversions.

Steven Rosenthal, a senior fellow at the Tax Policy Center, said the Justice Department would look at anti-trust issues. It is possible the merger could draw the wrath of the Treasury Department if it issues more anti-inversion rules between now and when the deal closes.

Jordan Fabian contributed.