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Why Pfizer is so bent on lowering its tax rate

Pfizer (PFE)'s planned acquisition of Ireland-based Allergan (AGN) is the latest wrinkle in the U.S. pharmaceutical giant's aggressive tax-minimization strategy undertaken by CEO Ian Read.

According to Matthew Gardner, executive director of the Institute on Taxation and Economic Policy, the New York-based company has 151 subsidiaries in known tax havens such as the Cayman Islands. Pfizer also claims to have lost $16 billion in the U.S. over the past five years while earning about $80 billion overseas. Between 2010 and 2012, it paid no U.S. income taxes, according to Americans for Tax Fairness.

Pfizer gets approximately 40 percent of its sales from the U.S. As of June 30, it had $30 billion in cash and cash equivalents, most which is held overseas. That's about 10 times the size of the economy of Belize.

"They are already doing their best to pretend that they're a foreign company," Gardner said.

Read has argued for years that the U.S. tax system places his company at a competitive disadvantage compared with overseas rivals because the American statutory corporate tax rate of 35 percent is the highest in the industrialized world. He told The Wall Street Journal the U.S. tax code is "an urgent issue that we need to fix."

However, tax experts liken the statutory tax rate to the sticker price on a new car, which few people actually pay. What companies actually pay is known as the effective tax rate.

In Pfizer's case, that's around 25.5 percent. Merging with Allergan, which is domiciled for tax purposes in Ireland even though it operations are based in New Jersey, will enable Pfizer to lower its rate to 15 percent. That process is referred to as an inversion, and Read is so keen on the idea that he tried twice before to combine Pfizer with an overseas partner to achieve it, but those attempts fell through.

"The whole idea of an inversion is to allow you to shift income earned in the U.S. to more favorable locales," said Robert Willens, an independent corporate taxation and accounting expert, adding that he's unaware of any executive who pursued lower taxes with the zeal of Read.

Pharmaceutical and tech companies have lower effective rates than other industries because they have large portfolios of intellectual property that can be easily shifted to offshore affiliates. Both Democrats and Republicans have called for lowering the statutory rate, but given Washington's toxic political climate, experts are skeptical that change is on the horizon.

"For some companies, like retailers and service companies, they don't have an offshore planning potential, so 35 percent is a problem," said Martin Sullivan, chief economist with Tax Analysts. "It's a little surprising that of all companies, Pfizer is complaining about high taxes since it benefits the most from the current system."

Pfizer didn't respond to a request seeking comment.

Even with the lower effective tax rates, U.S. companies are still at a global disadvantage because foreign governments also provide tax breaks to companies, enabling them to lower rates even further, according to Scott Hodge, the president of the Tax Foundation.

"The U.S. still has one of the highest effect effective tax rates in the world because we start with a high statutory rate," Hodge said.

Though the Obama administration last year enacted rules to make inversions more difficult, experts say it probably wouldn't derail a combination of Pfizer and Allergan. According to Hodge, the deal probably will be structured as an Allergan purchase of Pfizer, so the rules wouldn't apply.

Companies have been reluctant to pursue inversions because of the negative publicity they have generated in the past. "I don't think that's true any more," Hodgesaid. "The need to be globally competitive outweighs any sort of bad publicity (or) demagoguery about lack of patriotism."

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