Corporate Tax Evasion

In the debate over the federal budget’s deficit, it is frequently mentioned that the problem is the government’s excessive spending on social safety net programs, ignoring the fact that tax revenue is much less than it should be. The red numbers would surely be much lower if large corporations did not commit such gargantuan tax evasion.

The merger between pharmaceuticals Pfizer and Allergan announced yesterday ‒ which creates the world’s largest company of its type ‒ is an example of the way this intent to evade taxes is enforced to the bitter end. This is a “corporate inversion,” meaning that U.S.-based Pfizer agreed to be bought by Ireland’s Allergan in order to form a new Irish corporation whose executives are based in Dublin but whose central headquarters and operatives are in New York.

According to Pfizer, one of the main reasons to move to Ireland was to reduce their tax obligations. Although the U.S. imposes a 35% tax on corporations ‒ the highest in the industrialized world, ‒ the law has more holes than a colander. The system encourages foreign sales and charges taxes to enter the country. Companies such as Burger King ‒ which moved to Canada ‒ and Chiquita Brands ‒ which moved to Ireland‒ have left on “corporate inversions.”

Pfizer’s case is interesting because the company took advantage of every legal accounting resource available to evade taxes. Their books show that, although they do pay, they do so only when the money has entered the country. They sold their patents and drug manufacturing to an Irish subsidiary long ago, who then sell the product to Pfizer in the U.S. That allowed Pfizer to report losses for five consecutive years even though medicines in this country are sold at the highest prices in the world. A win for investors.

It is estimated that, in 2012, Pfizer alone had $148 billion parked outside of the United States. This is only one of the many companies ‒ including Apple and Cisco ‒ which keep their money elsewhere. The solution is a change in tax laws that reduces rates but eliminates exemptions.

While this is a challenge, a greater one is changing the mentality in executive offices to allow large corporations to again be the “good corporate citizen” they once were.