Finance / International Business / Organizational Strategy

Pfizer, Taxes, and Justice

Pfizer is a pharmaceutical corporation headquartered in the U.S. with management that is unsatisfied with the high corporate tax rates in the U.S.  When discussing the U.S. tax rates, Pfizer’s CEO Ian Read has been quoted saying the corporation is at a “tremendous disadvantage.”  Pfizer, complying with proper accounting practices, is only paying about 1/3 of its total tax expense for 2014, which is around $1 billion.  The other 2/3, or $2.2 billion, is written in their accounting books but due to Pfizer booking their profits in countries outside of the U.S. they may never actually pay that amount if the profits remain reinvested overseas.  Pfizer has a total of $74 billion reinvested overseas and is currently looking to merge with Allergan PLC.  This merger would give Pfizer a legal overseas address and allow Pfizer to never pay the high U.S. tax rates.[1]  By merging with the overseas corporation Allergan PLC, Pfizer is reducing their tax expense through a tax or corporate inversion by reincorporating with an overseas address in a country with lower tax rates.[2]

In agreement with Ed Outslay, a tax accounting professor at Michigan State University quoted in the Wall Street Journal article, it does not make sense why Pfizer is complaining about the high taxes when they do not affect the corporation.  From Pfizer’s standpoint, this is good management because the company is compliant with tax laws and their earnings are not affected by the portion of taxes they do not pay by keeping profits overseas.  Pfizer, applying the ethical theory of justice,[3] attempts to be seen as the victim by highlighting their compliance with their accounting practices and expressing that the U.S. tax rates are unjust.  In John Rawls’ Theory of Justice, the second principle states that social and economic positions are to be of equal opportunity to all.  Pfizer uses the argument that other countries do not have nearly as high tax rates as the U.S.

From other U.S. companies’ standpoints, specifically Pfizer’s competitors, they may view Pfizer’s accounting practice as unjust because they are not granted the second principle of John Rawls’ Theory of Justice – equal opportunity to all.  Competitors that do not operate outside of the U.S. have no choice but to book all of their profits in the U.S. and pay all of their tax expense.  They cannot gain the advantage that Pfizer has unless they begin a multinational operation.  Multinational operations do not come at a low risk level though.  Pfizer would have to overcome geographical dispersion and the many risks associated with a merger.  Some of the risks include failure due to poor communication, not harmonizing objectives of the two firms, or lack of aligning cultures.  Failure in meeting these factors would ultimately result in a loss of their investment if the merger failed.[4]

Pfizer is managing their corporation in a way to keep a higher amount of their profits by paying only a portion of their tax expense to the U.S and booking a large part of it overseas.  Their management is being irrational to complain about the U.S. tax rates when they are not affected by them.  Pfizer, if they proceed with the merger with Allergan PLC, puts itself at a great advantage through the corporate inversion to permanently reinvest profits overseas and never have to pay the high U.S. tax rates.  With a successful merger and corporate inversion, their frustration with the U.S. tax rates can be greatly diminished.

Shayna Fiorina

 

Sources:

[1] See Wall Street Journal article “Pfizer Piles Profits Abroad” written by Richard Rubin and published electronically November 8, 2015.

[2] See ‘corporate inversion’ definition from Investopedia published electronically November 19, 2003.

[3] John Rawls Theory of Justice states two conditions: every person has basic rights and every person has equal opportunity in both social and economic situations.  With both principles satisfied society is fair and morally acceptable.

[4] See LinkedIn Pulse article “Mergers and Acquisitions – The Four (4) Greatest Risk Factors for Leaders and Managers” written by Terina Allen, CEO of ARVis Institute electronically published on June 8, 2014.

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