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Pfizer, Allergan inversion deal inverted by Treasury hacks

Written By | Apr 6, 2016

WASHINGTON, April 6, 2016 – Washington, not downtown Manhattan, is dominating today’s trading action. The detritus continues to hit the fan concerning the Obama Administration’s typical ham-handed (and possibly illegal) derailing of the latest U.S. corporate tax-escaping “inversion” transaction involving mega pharmaceutical companies Pfizer (symbol: PFE) and now Dublin-based Allergan (AGN).

Pfizer hearts Allergan: DOA

Allergan’s web site has posted the following news release:

“Allergan plc (NYSE:AGN) announced that its merger agreement with Pfizer (NYSE: PFE) has been terminated by mutual agreement, effective today. In connection with the termination of the merger agreement, Pfizer has agreed to pay Allergan $150 million for reimbursement of expenses associated with the transaction.

“Allergan reiterated its compelling standalone growth profile and strategy following the announced termination of the combination of the two companies. Allergan is positioned to drive strong, sustainable growth powered by leading franchises, new potential blockbuster product launches and unmatched pipeline.

“While we are disappointed that the Pfizer transaction will no longer move forward, Allergan is poised to deliver strong, sustainable growth built on a set of powerful attributes. Leading therapeutic franchises with strong brands across seven therapeutic areas provide the foundation for continued strong growth in 2016 and beyond. Our pipeline is one of the strongest in the industry, loaded with 70 mid-to-late stage programs including 14 expected approvals and 16 regulatory submissions in 2016 alone,” said Brent Saunders, CEO and President.”

So it goes, even in the final disastrous year of the worst administration in U.S. history.

The whole idea behind the corporate inversion tactic here is this: the U.S. has by far the highest corporate tax rate among major trading nations. This has long encouraged larger U.S. corporations to keep their foreign profits abroad.

Unlike any other country of which we’re aware, the U.S. insists on taxing U.S. corporate profits made in foreign countries once again, even after these American firms have already paid the corporate tax levied by the foreign country. Hence, American companies have traditionally left their foreign profits in foreign banks, lest repatriating those funds here force them to pay what is essentially double taxation on their foreign profits.

No major foreign country does this. It’s treated as reciprocity among countries, much in the way individual U.S. taxpayers get a U.S. tax credit for dividends that have been already taxed by foreign companies.

For example, the Maven currently holds shares of British telecom giant Vodafone (VOD), both for its stable price and its high dividends. However, the Brits will take a small slice out of each dividend before sending the rest of it to the Maven’s account. When tax time rolls around, already foreign taxed dividends like this one permit the amount taxed by the foreign nation to be deducted from his final tax liability.

This has long been the case for individuals. But the Federal government, always greedy for more corporate and individual tax dollars simply refuses to lower the U.S. corporate tax rate or put a halt to the double-taxation of repatriated foreign corporate earnings. This accomplishes two things, neither of which makes much sense:

  1. U.S. Corporations continue to be incentivized to leave profits earned (and taxed) in foreign countries right where they are earned rather than “repatriate” those profits to U.S. corporate HQs, thus incurring a heavier and inevitably higher additional tax here.
  2. U.S. corporations—at least until Tuesday’s surprisingly blunt and stupid move by the Treasury Department essentially and unilaterally banning inversions—also have increasingly taken the route of merging with smaller but foreign-domiciled companies and then relocating their corporate headquarters to the foreign jurisdiction, thus giving corporate profits a major boost by taking advantage of demonstrably lower tax rates. That’s what “inversion” is.

U.S. corporate tax rates can get as high as a whopping 39 percent if you also count the often rapacious state corporate tax rates, particularly in a state like New Jersey, most of which can never get enough of other people’s money. Granted, certain write-offs and exemptions can modify this rate somewhat, but not all the time. Better to pick up and move to a friendly foreign locale where you don’t have to worry about hiring an army of accountants to dodge the slings and arrows of the IRS.

The favored place in recent years for executing corporate inversions is Ireland, which boasts the bargain basement corporate tax rate of 12 ½ percent the last time we looked. Even the math-challenged can see that this rate is about two-thirds less than Company X would have to pay here in the U.S.

BTW, do you think it’s a coincidence that Ireland—once one of the European basket cases once known as the PIIGS (Portugal, Italy, Ireland, Greece and Spain)—is the first and fastest of the five to escape the category? The Irish are recovering from a more significant financial disaster, in percentage terms than we had here in 2008.

Ireland is now much further along on the recovery curve, however, because… ta da! … their favorite corporate tax rates are drawing businesses—and their taxes—into the country rather than forcing them to flee. The result is—wait for it—growth. What a concept.

The corporate tax issue is easily solved here and always has been easy to solve. The solution once again includes two easy steps:

  1. Cut the damned U.S. corporate tax rate to the point where it’s once again competitive worldwide.
  2. Incentivize the literally trillions of corporate dollars sitting abroad to come back to America by either cutting the tax on repatriated funds to zero and engaging in tax reciprocity like nearly every other country does, or by at least cutting the U.S. tax close to zero for repatriated funds during a given “amnesty” period.

Either one of these would work, although Solution #1 is clearly simplest and best. And it’s effectively what Congressional Republicans have been trying to execute on Capitol Hill for years without success, due to that ever-ready veto pen our current lame-duck president loves to wield on any legislation that might help American corporations (and jobs) to grow.

Treasury’s likely unconstitutional diktat would seem, unsurprisingly, to usurp the power of Congress over such matters. It’s time for Republicans to step up and invalidate this latest White House-Treasury power grab.

Allergan’s CEO alluded to this, in fact, when speaking with CNBC reporters this morning:

“For the rules to be changed after the game has started to be played is a bit un-American, but that’s the situation we’re in,” Saunders told CNBC’s “Squawk on the Street.”

“We built this deal around the law, the regulations, all the notices that were put out by the Treasury and it was a highly legal construct,” he added. “We followed the rules that Congress had set for companies looking to move to foreign domicile.”

Make no mistake: the Maven doesn’t endorse U.S. corporate inversions either. If nothing else, such moves demonstrate a distinct lack of patriotism. However, given an administration that is perpetually hostile to American businesses and the jobs they (could) create, we can’t blame those companies that have been taking the inversion route as long as it remained available. If there’s little or no hope of changing a hostile economic climate, a company has to do what it has to do to keep prices (and ultimately profits) competitive. It’s a quaint notion, popularly known as “capitalism.”

As for Allergan and Pfizer—we are seeing estimate of between $150-400 million dollars as the penalty to Pfizer for the termination of the merger agreement the larger company has just announced. The penalty figure, as per the agreement between the two companies, was intentionally set considerably lower if their proposed transaction were derailed by any government—which it just appears to have been.

That said, there’s still room to maneuver here if Congressional Republicans would finally do something they were elected to do in 2010, 2012 and again in 2014—namely, thwart the destruction of America that’s been the sole undertaking of the current president from the day he was inaugurated.

However, expecting nearly anything from the perpetually supine GOP is probably not realistic. If Republicans don’t step up and stand for something soon, they’ll almost certainly lose the Senate this fall. But we won’t hold our breath. Not for nothing are the feckless Republicans known as the Stupid Party.

At any rate, we’ll have to see where this goes next. If we were betting on the outcome today, we’d have to say that the Pfizer-Allergan deal is permanently DOA.

The Fed waffles once again on interest rates

In an unrelated postscript to today’s big anti-inversion news, the Fed didn’t announce an imminent interest rate in its Wednesday afternoon report, helping boost stocks a bit along with the price of oil as the dollar slipped back once again on the news. Next bet for an interest rate hike is June. But street pros are even betting against this one.

It would seem that once again politics dominates in the area of monetary policy or the lack thereof. For years, this Administration has been pitching the lie that the U.S. economy is getting ever more robust, ignoring the fact that middle-class paying jobs are dying even as menial, low-paying jobs are what’s currently going, which is by intent. When the peasantry doesn’t make very much money, they routinely vote for Democrats. Game, set and match.

Politics aside, Fed knows better than to completely embrace the Marxist program. Most Fed members already know that we’ve been encountering deflation in recent years instead of hoped-for inflation. The economy remains in effective stasis since nobody in the corporate world wants to make a big move toward growth, research or risk.

Corporate CEOs know the current administration is always ready with a fresh punishment for anything that would aid corporations or put Americans back to work in jobs other than flipping burgers. So they trim good paying jobs and buy back their own shares to create the illusion of better earnings, thus transforming this administration’s lies into socialist dreams come true.

The Fed is still a creature of the Executive Branch in the end. They could easily attack this feckless administration but they won’t. Under Obama, any flak from a truly independent Fed would result in an executive order terminating the Federal Reserve and putting monetary policy directly under the thumb of the executive. The Hunger Games would follow.

So the Fed is currently defaulting toward their same old “stimulative” course—the one they’ve been on, in effect, since 2009—fighting U.S. and worldwide deflation while the administration brags about all the fake jobs our phony “recovery” has brought about under Barack Obama’s enlightened administration. Nancy Pelosi and Harry Reid continue to treat the Congressional establishment Republicans as the eunuchs they were and are, so Congress will likely sit out this round just as it has with all the others.

Continuing U.S. economic entropy has effectively combined with current world chaos to make investing in stocks about as treacherous as it’s ever been. Along with far more widely-known economic experts, the Maven just sits here stupefied and the prevailing stupidity. Why today’s politicians, knowledge workers and wealthy elites regard themselves as today’s intellectuals has become a mystery of mass hubris. No wonder the peasants are revolting.

Wednesday Market Notes

Long column today, so we’ll just report Wednesday’s better-than-we-expected closing numbers on Wall Street.

The Dow Jones Industrials (DJI or DJIA) closed up 112.73 points, just over half of one percent. The S&P 500 closed up a more robust 21.49, a little over 1 percent in the green. The NASDAQ did even better, closing up 76.78, a nearly 1.6 percent jump. Much of this may have been due to some hopefulness in the oil patch, as U.S. West Texas Intermediate (WTI) reversed this week’s header somewhat by gaining $1.88 per barrel to close at $37.77, an impressive jump of 5.24 percent, indicating just how volatile black gold currently remains.

Terry Ponick

Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17