Editorial

Pfizer-Allergan's Rx for tax avoidance

You've got to hand it to pharmaceutical giant Pfizer Inc.: It's managing to make Americans resent drug companies even more than they already did.

The maker of Viagra and Lipitor is the latest to announce a merger that's designed at least in part to escape high U.S. corporate tax rates. In a $160-billion deal, it would subsume itself into a smaller foreign rival, Allergan, to create the world's largest drug manufacturer — still called Pfizer, still operating out of New York City, but based for tax purposes in Allergan's home of Ireland. (Allergan itself was a U.S. company until an Irish drug maker bought it in March.)

Politicians roundly blasted the blockbuster deal, as they have previous episodes of corporate re-flagging. To many policymakers, these tie-ups are nothing more than tax evasion; the U.S. companies involved often don't move their operations, they just use accounting techniques to shift what tax authorities consider their home.

Just last week the Treasury Department announced new rules aimed at blocking this sort of corporate "inversion," but Pfizer and Allergan structured their deal in a way that's expected to shield them from those regulations. That's been the result every time Congress or the administration has tried to halt these maneuvers: Companies figure out how to do them anyway.

The root of the problem is that lawmakers have enacted tax policies seemingly without regard for what the rest of the world does, as if large companies don't have plenty of alternatives when looking for a place to call home. Not only does the United States have the highest corporate tax rate in the developed world, it's the last of the major countries to tax a multinational company's foreign profits — a tax it collects when the company puts those profits to use in the U.S. The result is a powerful incentive for companies to plant their headquarters (for real or just for tax purposes) elsewhere, or just not to repatriate any of the money earned outside our borders.

Simply put, Congress needs to make U.S. business taxes more competitive with the rest of the world's. That includes lowering the rates, preferably by winnowing the thicket of exemptions, deductions and credits so as not to reduce the total amount raised. It's politically daunting because some companies would get a tax cut while others would pay more, and the latter would lobby fiercely to preserve the status quo. But it's something lawmakers will have to do if they want to stop the exodus of multinationals to lower-tax locales.

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A version of this article appeared in print on November 25, 2015, in the Opinion section of the Los Angeles Times with the headline "An Rx for tax avoidance" — Today's paperToday's paper | Subscribe
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