Enrique Dans
Published in

Enrique Dans

The merger of Pfizer and Allergan: another “Irish” company is born

The merger between pharmaceutical companies Pfizer and Allergan, valued at €160 billion, raises a number of complex questions. Leaving aside the questions of synergies and strategic focus, this is an acquisition between a large company, Pfizer, and a smaller one, Allergan, the aim of which is to allow the resulting conglomerate to be based in Ireland, where it will pay between 17 percent and 18 percent tax, as opposed to the 25 percent it would face in the United States. At the scale this new company will operate, that is a significant saving, and as far as most analysts are concerned, is the reason for the operation.

Which prompts the question as to whether it makes any sense to criticize companies for using perfectly legal mechanisms to reduce their tax payments? If we accept that a company’s responsibility is to maximize shareholder value, then it’s pretty obvious that these shareholders will be over the moon that the company is optimizing its tax payments, allowing it to increase its value yet more or to pay out bigger profits.

Obviously, this isn’t something that can be interpreted in absolute terms: the concepts of value and maximize, and even shareholder can be interpreted differently. We know what happens when a company is too aggressive in one of these areas: governments start passing special laws to avoid losing the revenue from low tax rates, along with other possible damage to their reputations.

But what about the stakeholders, the rest of us who are affected by a company’s activities one way or another? We may be disappointed when we see that company do it utmost to avoid tax by locating in a particular country. Furthermore, how do we quantify the harm companies do by locating to tax havens, and what are we, as consumers, going to do about it? Does anybody really stop using this or that company’s services on the basis of where they pay their taxes?

Is the market sufficiently mature to be able to take into account these shades of grey when deciding whether to purchase something or not? At bottom, we beginning to relegate something as specific as paying taxes to corporate social responsibility, an area that few companies stand out in.

What happens in a world where paying taxes has become virtually a question of choice, subject to creative accounting and fiscal engineering? The reality that so few people want to talk about is that while the internet truly is global, the rest of the world is still living within its own borders. However, we have to now accept that all the laws and the borders that allow a country to make its own decisions about taxes are completely obsolete.

In other words, we’re trying to find our way in a globalized world using tools that quite simply are obsolete. Suggesting that Ireland shouldn’t use its tax policies to give it a comparative advantage in attracting investors and generating employment makes no sense, and neither does trying to get laws passed to prevent it from doing so. In other words, in a world where information flows freely and transactions can be carried out in seconds, it is extremely difficult to prevent companies from reducing their tax burden.

Pfizer and Allergan’s merger may be an extreme case, but it is not the only one, by any stretch: more will follow in other industries. This isn’t something that only affects one industry or one country: this is a trend that can only be halted by changing something that nobody so far seems able to change. Nor is there much likelihood of aligning tax policies internationally, and even less possibility of doing away with borders. So while the present situation continues, companies with a global presence will be able to implement strategies to reduce how much tax they pay.

The size of the Pfizer-Allergan operation has prompted reactions among US politicians. France has already taken measures against Amazon, forcing the online retailer to pay tax in France on all of its activities there; other countries will follow suit.

When tax optimization becomes too aggressive, countries respond, albeit with temporary solutions.

It has yet to be seen if the United States will take action against Pfizer or will allow it to become an Irish company. Either way, the case illustrates like no other so far the global misalignment between the world that existed until not long ago and the world of today. New times, but that are being managed using old tools. Sorting this out is not going to be easy…

(En español, aquí)

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