The Pfizer deal - pointing the finger at Ireland

Labeling seems to be something we as Americans do more of these days.  I know I am as guilty as anyone but the consequences can be dangerous and lead to inaccurate perceptions which can lead to false realities.  I think that referring to Ireland as a "tax haven" falls into this category.  Aside from the fact that Ireland does not meet the standards of a so-called tax haven, as defined by the OECD, (see here) there remains those who irresponsibly and cavalierly label the country as such.  

This issue has yet again raised its head with reports of the massive deal between Pfizer and Allergan and the anticipated move of Pfizer's operations to Ireland where Allergan is headquartered.  On Monday the Irish Times reported, 

"A deal, structured as a tax inversion, would see Pfizer move its tax base to Ireland where Allergan is based, allowing the company to avoid US tax bills on more than $128 billion of profits earned overseas."

The deal has reignited an on-going debate about US companies based in foreign countries for the sole purposes of evading US tax.  Ireland has been front and center as many major US corporations call Ireland their legal home where there is a 12.5% corporate tax rate.  The arguments, however, too often put the focus on other countries' practices and sets blame on them for offering an unfair advantage. An alternative, that would unfortunately require Congress to come together on something, would be a frank and substantive discussion about the problems with our own tax code and ultimately a comprehensive legislative package to address the effect of corporate taxation on international business. After all, our own corporate rate has been a whopping 35% for some time and Ireland did not set its corporate tax rate yesterday.       

American politicians are no strangers to this debate.  In 2004, Congress passed a law (26 U.S. Code § 7874 - Rules relating to expatriated entities and their foreign parents) that, among other things, took aim at corporations engaged in "corporate inversions" - which is basically reincorporating in a foreign country that has a low corporate income tax rate allegedly for the sole purpose of avoiding US tax on that income.  The term "expatriated entity" was born in this law.  

President Obama supported the initiative and specifically mentioned Ireland as a target country. Former US Sen. Carl Levin who was extremely vocal in his characterization of Ireland as a tax haven - supported only by his own "common sense" test, expressed his outrage with Apple, referring to its strategy as "the Holy Grail of tax avoidance" (Washington Post 5/20/13) - using what became known as the "Double Irish" tax.  Sen. Bernie Sanders has added his voice to the mix in his run to win the Democratic nomination for the Presidency, which is no surprise as he considers himself a socialist - although I doubt there are many Americans who can appreciate what true socialism is.  

In an effort to preserve its tax rate and appease critics from the US and Europe, Ireland eliminated the so-called "Double Irish" tax, coined as such because companies would establish 2 subsidiaries in Ireland - one that collects profits and another that moves those profits through a separate entity headquartered in a country with a lower rate than Ireland's.  

Although legal, are these tax schemes unfair to America?  There is certainly a strong argument in favor, but in the interests of transparency and honesty, there is also a strong argument that the classification of Ireland as a so-called tax haven is not only false but also grossly unfair.  

All too often, politicians and others attribute a company's presence in Ireland solely to avail of its corporate income tax rate without looking deeper and considering the many other benefits the country has to offer to help business thrive.  

To suggest that a 12.5% corporate tax is the sole consideration a company gives in moving to or expanding into Ireland is, in my opinion, either naive or manipulative.  Is the rate attractive? Of course it is, particularly given the fact that the bottom line purpose of a business is to make a profit.  

Lest we forget, Ireland offers: 

• a highly talented and skilled workforce,

• outstanding and competitive schools and universities (1 of top 10 countries globally),

• competitive cost of living,

• stable labor costs,

• 5 hour flight from the east coast,

• English speaking,

• excellent quality of life,

• proximate gateway to Europe for US companies;

• and yes - competitive corporate tax rate at 12.5%

In none of the recent reporting on either side of the Atlantic that I have read or listened to has there been any discussion of the above referenced benefits or, for example, the R&D and regulatory advantages which are available in Ireland and the EU - particularly for biotech, life sciences and medical device companies.     

Also, for anyone to suggest that the US is losing significant jobs to Ireland is inaccurate.  Due to a lack of jobs, Ireland has seen hundreds of thousands (89,000 in 2013 alone) emigrate from its shores since the Great Recession (many in their twenties) in search of work to places like Canada and Australia.  

Let's not forget Northern Ireland which is home to many blue chip American companies - as I made reference to in this blog last year.  

AllState, Liberty Mutual, CVS, Chicago Mercantile Exchange, NY Stock Exchange, Intel, Concentrix, and Citi to name but a few.  These companies, however, pay the UK corporate tax rate of 20% and are indeed happy as I learned first hand visiting Liberty Mutual in Belfast last September.  

In 2018, there will finally be the devolution of tax powers to the Northern Ireland Assembly from Westminster and the corporate tax rate as proposed is 12.5% - consistent with the south.  Are they the next haven?   

Aside from being outright false, the danger here is that Ireland, in the context of business, becomes a euphemism for tax haven.  For all that the emigrants of that country have done for ours and for the incredible business partnerships that have been developed between our countries, it would be shameful for that to happen.  Ireland deserves more than soundbites and labeling.