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CORPORATE INVERSION: A QUESTIONABLE PRACTICE? ETHICAL DILEMMA Pizer Pfizer had already attempted to buy the British pharma- ceutical giant AstraZeneca in 2014 but had been turned away over a disagreement over valuation. The decision to switch to Allergan was a clear indication that the interest was not in any strategic synergy or new drug combinations under development. The deal was about reducing Pfizer's tax bill. By merging with an overseas company, and basi- cally giving up its U.S. citizenship, Pfizer could reduce its tax bill to an estimated 18 percent. While the combined federal and state corporate income tax rates in the United States can be as high as 35 percent, as compared to average of 25 percent in Europe, detailed tax strategies usually enable U.S. corporations to reduce their domestic tax bill significantly. Merging with or buying, an overseas corporation and changing your tax home or "domicile" allows a further reduction in the tax rate. However, this process of "corporate inversion is even more devious. Being domiciled overseas would allow Pfizer to access global profits that were being kept overseas to avoid payment of U.S. taxes on those earn- ings. The potential savings of $35 billion explained the company's eagerness to find a willing suitor. Pfizer was not alone in recognizing the potential savings of such corporate inversions. In 2014, the American fast- food chain Burger King acquired the Canadian coffee and donut chain Tim Horton's, moving its corporate domicile to Ontario with a maximum corporate tax rate of only 26.5 percent Spencer Platt/Getty Images In November 2015, pharmaceutical companies Pfizer and Allergan formally announced a $160 billion merger-the largest medical merger in history-creating a company with a combined stock market valuation of over $300 bil- lion. It was by no means a merger of equals. Pfizer, based in New York with assets of more than $170 billion, pro- duces some of the most well known drugs in the U.S. market, including Lipitor (a cholesterol drug), Zithromax (an antiobiotic), and Celebrex (an anti-inflammatory drug) Allergan, based in Dublin, Ireland, has a valuation of one. third of that of Pfizer, and is most well known for its Botox drug. What, then made the deal so attractive? CHAPTER 9: ETHICS AND GLOBALIZATION 17 In April 2016, the U.S. Treasury Department announced a rule change targeted at closing the "corporate inversion" 2. Proponents of such deals claim that they are simply loophole that President Barack Obama had labeled "insid- maximizing profits and shareholder value. Does that lous" and "unpatriotic." Pfizer announced shortly afterward make them ethical? Explain your answer. take place, and that the company would book a charge of that the planned merger with Allergan would no longer 3. Why did the U.S. Treasury introduce a rule change? 4. Do you think the change will hold, or will lobbyists $150 million to compensate Allergan "for reimbursement succeed in getting the rule reversed? Explain your of expenses associated with the transaction." answer The chief executive of Allergan, Brent Saunders, voiced Sources: "Inverted Logic. The Economist, August 25, 2015: his frustration with the decision, stating that the U.S. Trea- *Pfizer and Allergan Agree to a $160 Billion Merger The Econo sury was "building a wall around the U.S. to keep people mist, November 23, 2015. Ronse Merle, "Giving up its U.S. Citi- in." With several other multibillion-dollar inversion deals zenship Could Save Pfizer $35 Billion in Taxes." The Washington still in negotiation from such companies as Coca-Cola Co. Post. February 25, 2015: Nathan Bomey and Kevin McCoy, "$160 Billion Pfizer, Allergan Inversion Scrapped." USA Today, April 6. and Johnson Controls, it seems likely that there will be 2016: Renae Merle and Carolyn Y. Johnson, "Pfizer, Allergan Call aggressive lobbying to change the new rules. off $160 Billion Merger after US. Moves to Block Inversions. The Washington Post, April 6, 2016, and "Pfizer Abandons S160bn Allergan Deal, BBC News, April 6, 2016. QUESTIONS 1. Does the higher U.S. corporate tax rate provide sufficient justification for these inversion deals? Why or why not