Pfizer dodges $35 billion tax bill with overseas merger, report says

A consumer group is accusing Pfizer of seeking to avoid $35 billion in U.S. taxes with its plan to buy fellow drugmaker Allergan in a deal structured to nominally move Pfizer's address to lower-tax Ireland, Allergan's home.

In a report released Thursday, Americans for Tax Fairness says that would also slash future U.S. taxes paid by Pfizer Inc., which will keep its operational headquarters at its New York City base. Pfizer would still have to pay U.S. taxes on income earned in the country, but not overseas.

The group has been urging federal regulation changes to block not just the Pfizer deal, but a surge of other companies in various industries doing deals termed "tax inversions" to slash their U.S. tax bills. That lost revenue ultimately comes out of the pockets of consumers and other taxpayers.

Americans for Tax Fairness also accuses Pfizer of gouging Americans with frequent and excessive price hikes on its medicines while benefiting from multiple loopholes and tax deductions that reduce Pfizer's average global tax rate to 6.4 percent. That's well below the 24 percent Pfizer has claimed.

At a news conference in Washington, the group and five Democratic members of the House said the federal government can and should block Pfizer's $160 billion acquisition of Allergan. Pfizer, the world's second-biggest drugmaker by revenue, says the deal is set to be completed in the second half of 2016.

"This is theft, what Pfizer is doing," Frank Clemente, executive director of Americans for Tax Fairness, said in an interview. "This is a company that's extremely profitable. It's ripping us off in two ways. It's dodging taxes and jacking up prices."

He said that while Congress won't pass laws to address inversions and other questionable tax-lowering strategies during an election year, the Treasury Department could set new rules that would eliminate at least part of those tax savings. That could discourage Pfizer and other companies from pursuing inversions.

In a statement to The Associated Press, Pfizer said, "The proposed combination of Pfizer and Allergan will create a global, R&D-focused company with the ability to lead in the quest to find cures and treatments for patients with the most feared diseases and conditions of our time, such as Alzheimer's disease, Parkinson's disease, cancer and rare genetic disorders.

"This transaction is not structured to move jobs out of the United States, where we conduct the majority of our research,"Pfizer wrote.

A company spokeswoman declined to address the contents of the 28-page report, which doesn't mention the deal's impact on U.S. jobs. But it discusses Pfizer's impact on U.S. patients and taxpayers in depth.

It says that in recent years, Pfizer has repeatedly raised prices of its top-selling drugs, including erectile dysfunction pill Viagra, pain treatments Lyrica and Celebrex, and antibiotic Zyvox. Pfizer raised prices on those and three other drugs on average by 39.2 percent from 2013 through 2015 — 23 times overall inflation then. This year, it's already raised prices on about 60 drugs by more than 10 percent on average.

The tax group states that patients in Ireland pay about one-twelfth what Americans do for Pfizer's seven top drugs. That's because Ireland and virtually every country except the U.S. sets limits on drug prices. The group suggests Pfizer cut its drug prices in the U.S. to what it charges in Ireland.

Most of those seven drugs have patents that recently expired or will soon. It's standard procedure for most drugmakers to jack up the price of their drugs at that point, to make as much money as possible before cheap generic versions flood the market and grab most of the sales.

The report notes Pfizer benefits from an educated U.S. workforce and infrastructure here, and makes about 5 percent of its U.S. sales to the federal government, about $1.01 billion a year on average from 2011 through 2014.

The report also states that Pfizer gets tax credits averaging $118.1 million a year by writing off part of its costs for research and for manufacturing done within the U.S. It also claims Pfizer got annual tax breaks averaging $7 million from 2011 through 2014 via a loophole that lets it deduct millions in excess compensation to top executives in the form of stock options tied to their performance.

The report is the second Americans for Tax Fairness has issued since November criticizing Pfizer's planned inversion. The group is a coalition that claims 425 national and state member groups pushing for "comprehensive, progressive tax reform."

Ironically, Pfizer and other U.S.-based drugmakers also want Washington to reform the tax rules. They claim they are at a disadvantage because the U.S. taxes their profits made both in the U.S. and in other countries, minus taxes paid to those countries. Drugmakers based in other countries generally only pay taxes on profits made in each country where they operate.

But while the U.S. companies complain that the nominal top corporate tax rate in the U.S. is about 35 percent, most in the pharmaceutical industry pay a tax rate of around 20 percent, due to various tax credits and deductions. Ireland's rate is about 12 percent.

Also Thursday, Democratic members of Congress sent letters to Treasury Secretary Jack Lew requesting new rules to limit inversions and "tax avoidance schemes" used by U.S. multinational corporations to reduce their U.S. taxes. The letters were sent by Rep. Lloyd Doggett, D-Texas, and the other four House members at the press conference, and by Sen. Dick Durbin, D-Ill., and six other senators.

"In 2004, Congress acted to prevent these types of deals," Durbin's letter noted. "Since then, more than 40 corporations have used a loophole in the law to avoid U.S. taxes, with the trend expected to continue and worsen over the next few years."