AGN Allergan plc

By Richard Rubin 

WASHINGTON-- Pfizer Inc.'s decision to escape the U.S. tax system by putting its legal headquarters in Ireland puts even more pressure on lawmakers to revamp tax rules and prevent the corporate tax base from eroding. But the largest corporate inversion in history is unlikely to dislodge the obstacles that have prevented action.

The political and technical hurdles to overhauling the tax code--even a limited set of changes to the taxation of U.S. companies' foreign income--have stymied lawmakers for years. And the fragile consensus that emerged between President Barack Obama and congressional Republicans is now under attack from both sides.

Pfizer and Allergan agreed on a merger deal worth more than $150 billion that would create the world's biggest drug maker and move one of the top names in corporate America to a foreign country.

"This only further underscores the arcane, anticompetitive nature of the U.S. tax code," Senate Finance Committee Chairman Orrin Hatch (R., Utah) said after Pfizer's announcement. "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."

That is tough to do. Sens. Charles Schumer (D., N.Y.) and Rob Portman (R, Ohio), along with House Speaker Paul Ryan (R., Wis.) and Ways and Means Chairman Kevin Brady (R., Texas), have been trying to keep hope alive for a limited international tax deal in 2016, even after they couldn't attach one to a long-term highway bill.

The closer the presidential election gets, the harder that becomes. Republican presidential candidates have cited inversions in proposing their own plans to revamp the tax code. Vermont Sen. Bernie Sanders, a Democratic presidential candidate, called the Pfizer deal a "disaster" Monday and said the administration should block it.

Democratic front-runner Hillary Clinton said U.S. taxpayers would be left "holding the bag" because of the Pfizer deal. Mrs. Clinton said Monday she would be proposing specific business-tax proposals in the coming weeks. "I urge Congress to act immediately to make sure the biggest corporations pay their fair share, and regulators also should look hard at stronger actions they can take to stop companies from shifting earnings overseas," she said.

Under current law, U.S. companies pay the full 35% corporate tax rate--the developed world's highest--on all income they earn around the world. They get tax credits for payments to foreign governments and can defer the residual U.S. tax until they bring the money home.

That system, combined with rules that let foreign-based companies shift profits out of the U.S., give companies incentives to shift profits overseas or simply move their tax address to a low-tax country. As a result, few large multinationals pay 35%, especially those in the technology and pharmaceutical industries, where it is easier to locate profits in low-tax jurisdictions.

According to securities filings, Pfizer hasn't reported a pretax profit in the U.S. since 2007. Now, Pfizer is joining Medtronic PLC and Mylan NV outside the U.S. tax system. Pfizer cited taxes as one of the main reasons for its inversion, accomplished through a merger with Allergan PLC.

"There are benefits from tax," Pfizer Chief Executive Ian Read said Monday on CNBC. "If the benefits from tax weren't there, I would still try to do the deal, but I suspect the price would be different."

Each of the big inversion deals has prompted calls from Democrats and Republicans to make major structural changes. But the parties disagree on exactly what a new system should look like, and they have had trouble separating international taxes from the much tougher questions about the rest of the business tax system and individual taxation. Democrats, too, are much more eager to impose immediate curbs on inversions while they work on broader changes, and members of both parties say the two rounds of rules announced by the Treasury Department aren't enough. Treasury released its second set of inversion curbs last week.

"Tax-motivated corporate inversions have cost the U.S. tens of billions of dollars, and place an increasing burden on American taxpayers," said Rep. Sander Levin (D., Mich.), the top Democrat on the Ways and Means Committee. "It is clear that Republicans in Congress need to join Democrats in stepping up to the plate to address this issue."

Mr. Obama ran for office promising to end tax breaks that ship jobs overseas. Early in his presidency, he proposed tougher limits on companies' ability to defer their U.S. taxes on foreign income. Over time, he scaled back those proposals and began moving toward the Republican position.

Mr. Obama, big businesses and congressional Republicans eventually reached positions that roughly overlapped: A lower corporate tax rate, fewer breaks, lighter taxes on foreign income and a one-time tax on the more than $2 trillion in stockpiled foreign earnings. They split when it came to which breaks should go away and how the proceeds from that one-time tax should be spent. And they struggled with the politics of advancing a corporate tax bill without cutting rates for small businesses or simplifying the system for individuals.

Now even that consensus is starting to fray. Mr. Brady, the new Ways and Means chairman, says the U.S. should cut its corporate tax rate to 20% or lower. He argues the U.S. has gotten left behind as other countries cut their rates and that the 28% rate proposed by Mr. Obama or the 25% rate that was the Republican position is no longer low enough.

Meanwhile, some Democrats, notably Sen. Elizabeth Warren of Massachusetts, are criticizing Mr. Obama's proposals from the opposite direction. In a speech last week, Ms. Warren said corporations pay too little in taxes and called parts of Mr. Obama's plan a "giant wet kiss" to big companies.

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

November 23, 2015 14:29 ET (19:29 GMT)

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