Pfizer as Irish firm would swamp Ireland's national accounts
In 1849 with $2,500 borrowed from Charles Pfizer's father, cousins Charles Pfizer and Charles Erhart, young entrepreneurs from Germany, opened Charles Pfizer & Company as a fine-chemicals business. It began in a modest red-brick building in the Williamsburg section of Brooklyn, New York and by 2014 through organic growth and acquisition, it had the second highest revenues for a pharmaceutical company in the world. Now Ian Read, its Scottish-born chairman and CEO, wants the group to become Irish for tax purposes. If it succeeds, it will further distort Ireland's national accounts.
This week it was reported that Patrick Honohan, Central Bank governor, wrote a private letter dated 16 Aug 2015 to Michael Noonan, finance minister, warning that Ireland’s economic data were “seriously complicated” by the way in which the activities of multinationals were measured, highlighting that a significant part of the recent growth in production could be attributed to “distorting features”— the letter was released via a Freedom of Information (FOI) request but has not been published on the FOI, Department of Finance or Central Bank websites. That level of transparency will likely evolve over the next 20 years; this year the UK government was judged to be the most transparent in Europe while Ireland and Greece were among the worst.
Prof Honohan warned that total employment was still more than 10% below the previous peak with the result that the unemployment rate has only just fallen below 10% despite emigration.
Clearly, there has been a very significant improvement in the general government balance in recent years. But despite our expected exit from the corrective arm of the stability and growth pact this year, the fiscal job is not yet done...Neglecting these measurement issues has led some commentators to think that the economy is back to pre-crisis performance.
In 2002 Patrick Honohan, then an economist at the World Bank and Brendan Walsh, then a professor of economics at University College Dublin, co-authored a paper, Catching Up with the Leaders: The Irish Hare, on the dramatic take-off of the Irish economy.
Olivier Blanchard, in 2002 an MIT professor of economics, and until this year the chief economist at the International Monetary Fund, said in comments on the paper:
This paper is wise, informative, and contains two important warnings: 1) Beware of numbers — especially in a small economy with a large export import sector, low taxation of profit, and transfer pricing. 2) Beware of mono-causal explanations. No single factor, be it the low taxation of foreign firms, the subsidies from the European Union, the increase in the level of education, or the expansionary effects of fiscal consolidation — to take some of the theories floating in the literature — can account for the Irish boom.
Prof Blanchard added that "proximity may have bred excessive contempt. The authors undersell the performance of their country" — in a half decade the authors' scepticism would be vindicated.
In the past decade, American companies in particular have sought to move their legal residency overseas from the United States to cut their corporate tax bills while maintaining operational control in the US.
In 2014 President Obama cited Ireland as one of the countries which enables redomiciling or tax inversions which they are known as in the US: The White House defined an inversion:
A corporate "inversion" is what happens when a US-based multinational with operations in other countries restructures itself so that the US "parent" is replaced by a foreign corporation — and usually one that's in a country with a lower tax rate than the United States. As a result, on the whole, this means that corporate income tax that would otherwise be paid to the United States ends up going overseas. In other words, right now, our tax code allows any American company to merge with a foreign company (so long as that company’s shareholders own 20% of the combined firm) — and then “relocate” or “invert” to another country for tax purposes. This maneuver — which changes nothing about the actual operations that continue in the US — allows companies to dramatically reduce the taxes they owe in the U.S. by taking advantage of loopholes in our tax system. Meanwhile, they would continue enjoying the benefits and protections of the American economy — provided by our tax dollars. It's a big loophole — and right now, it’s completely legal.
Six of these "Irish" companies have a combined global payroll of 624,500 people — Accenture (305,000); Eaton (102,000); Medtronic (92,500); Seagate (52,000); Ingersoll-Rand (43,000) and Allergan (30,000). Accenture told Finfacts that it did not wish to be called a "US consultancy firm." Accenture Consulting, was spun-off from Arthur Andersen, the then US accounting giant, in 2001 and the new company had been incorporated in Bermuda.
The impact on the Irish national accounts of the Irish/American companies was outlined here in 2013 — it's one of the hidden distortions and when the CSO reports a Balance of Payments surplus, it may really be in deficit.
For example, Balance of Payments/ current account surpluses reported in recent years were in fact deficits — see here.
GNP (gross national product) which among other factors, excludes the profits of the significant foreign-owned sector that is included in GDP (gross domestic product), is no longer a reliable indicator because of the tax inversion distortions.
In 2014 Ireland's goods exports were valued at €113bn and goods imports were at €71bn giving a huge trade surplus of €42bn. Customs data put the value of exports at €89bn and imports at €54bn giving a surplus of €35bn. Overseas manufacturing known as "contracting" that is likely tax avoidance-related mainly explains the difference in the data.
Outward foreign direct investment (FDI) was valued at €523bn in 2014 compared with inward investment stock of €391bn — most of the outward FDI is in effect a fiction from an Irish perspective.
When Prof Honohan wrote his letter, industrial production was up 30% in 12 months but a small rise in employment in industry suggested that the impact on the economy was not significant.
Finfacts has been highlighting the anomalies for years:
The idiot/ eejit's guide to distorted Irish national economic data — Finfacts 2014 article
Can Ireland reduce its reliance on FDI by boosting Irish firms? — Kevin O'Malley, US ambassador to Ireland, surprised by "incredible statistic" on Irish jobs in US: it's a fairy tale!
Tax inversions were tacitly officially approved until recent times when they became politically controversial in the US.
Arthur Cox, Ireland's biggest law firm, noted in a tax briefing in 2011:
The effective corporation tax rate can be reduced to as low as 2.5% for Irish companies whose trade involves the exploitation of intellectual property...A well-known global company recently moved the ownership and exploitation of an IP portfolio worth approximately $7bn to Ireland.
It's believed that the company was Accenture.
Pfizer was valued at $214bn on Friday and at the end of 2014 it employed 78,300 and over 4,000 across 8 locations based in Cork, Dublin and Kildare. It announced this week that it's in merger talks with Allergan, mainly known as a maker of Botox, which is an American firm but it is legally Irish for tax purposes.
Allergan became Irish earlier this year as its acquirer Actavis, another American drugs firm, had become Irish for tax purposes in 2013. Actavis changed the group name to Allergan in recent months and it was valued at $120bn on Friday and in June had 30,000 employees. Over 1,000 people are employed in County Mayo.
The Wall Street Journal reports that many of the largest drugs companies are based in lower-tax countries than the US: 17 of the 25 biggest drug companies by market value are foreign, and they paid an average 17% tax rate last year versus 24% for the US companies, according to FactSet.
“We’re fighting with one hand tied behind our back,” Ian Read, CEO said in an interview. While declining to comment on the Allergan talks, he said Pfizer was “doing what we need to do to ensure that we can continue to innovate.”
The Journal says such a takeover would create a pharmaceutical colossus, with a market value likely exceeding $300bn. It would rank as one of the largest corporate mergers ever.
The market value of the combined group would be almost double Ireland's annual GNP and undistributed profits would be booked in Ireland's national accounts.
Pfizer’s tax rate was 25.5% in 2014 (the figures stated in financial accounts may differ from what is actually paid), versus the 4.8% rate paid by Actavis/ Allergan. Trimming that rate to 15%, for example, would save nearly $2bn in taxes, based on the profit Pfizer expects to post this year. Allergan is due to receive $41bn when it completes the sale of its generics business, which is expected to close early next year.
Last September the US Treasury announced restrictions that resulted in the cancellation of a number of planned inversions.
A Treasury spokeswoman said this week: “We are continuing our review of a broad range of options for further action.”
In 2014 Pfizer made an abortive bid for UK-based Anglo-Swedish drug maker AstraZeneca.
Hillary Clinton, the leading Democratic presidential candidate, and her opponent Senator Bernie Sanders, have both criticized the industry over price hikes and they have promised to end tax inversions.
"Hillary Clinton believes that our entire economy benefits when companies invest for the long term, not when they undercut competition by consolidating markets or juice profits by gaming the tax code," Ian Sams, a spokesman for Clinton’s campaign, said in an e-mail according to Bloomberg News, adding that Clinton "is committed to cracking down on so-called ‘inversions.’"
Pic on top: The Pfizer Biotechnology Campus, Grange Castle, West Dublin.
Chemicals + medical devices accounted for 58% of goods exports in 2014 up from 46% in 2005 while employment slightly fell over the decade.
Botox maker Allergan is in discussions about selling itself to Pfizer, a deal that would create the world’s largest drugmaker. Lex's Robert Armstrong picks apart the details.