House, Senate Democrats Call for Executive Action on Inversions

"Pfizer is not only America's biggest pharmaceutical company, but also one of our biggest tax dodgers and price gougers. To finagle even more tax avoidance, Pfizer now wants to renounce its American citizenship. While Pfizer wants to pay lower Irish taxes, it refuses to charge Americans lower Irish drug prices," said Congressman Lloyd Doggett. "Today we are issuing a formal plea for specific Administration action, backed up with line and verse regarding how that can be accomplished. The US Treasury is suffering from a form of severe bleeding that no overpriced Pfizer medication can stop, but to the Administration, we say use existing law, 'heal thyself.'"

"As if gouging the American people with overpriced prescription drugs wasn't enough, Pfizer is now trying to dodge $35 billion in taxes. You can't make this up." said Rep. Peter Welch. "Pharmaceutical companies provide good drugs that are life-saving and pain-reliving, but their prices are killing us. And now, Pfizer wants to pay Irish taxes but they won't give Americans Irish drug prices. The Administration should throw a monkey wrench into Pfizer's plan, stat."

"American taxpayers are fed up with big corporations shifting their tax obligations onto working families because Congress has failed to close the egregious inversion loophole," said Representative Chris Van Hollen. "We cannot continue to allow companies to shortchange hard working Americans simply by changing their mailing address. We must work to end this egregious loophole and the tax games inverted companies play using every means at our disposal."

Pfizer -- maker of Celebrex, Lipitor, Lyrica, and Viagra -- is attempting to permanently dodge an estimated $35 billion of U.S. taxes it currently owes by merging with Allergan, a drug firm based in Ireland, according to a new Americans for Tax Fairness report that was released today. The report also documents a rapid rise in Pfizer's prescription drug prices in recent years, and it compares the vast difference in the prices Pfizer charges for the same drugs in the U.S. and in Ireland, the country to which it is changing its corporate address.

"By dodging taxes while boosting prescription drug prices, Pfizer squeezes American families and communities from two sides at once," said Americans for Tax Fairness Executive Director Frank Clemente. "In the company's biggest insult to America yet, Pfizer's merger would allow it to go on enjoying all the benefits of being based here -- everything from a publicly-educated workforce, to an excellent communications infrastructure, to a reliable patent system -- without adequately paying to support them."

"We cannot continue to allow Pfizer and other corporations to pretend that they are American companies, reaping the benefits this country has to offer, all while claiming to be another nationality when the tax bill comes," said Congresswoman Rosa DeLauro (CT-03). "Corporations are cheating the American people out of revenue that could make a real difference in the lives of children and families, so that they can dodge taxes and gouge prices. The Administration must take action, but Congress also needs to work to stop inversions. We must do better."

"As a small business owner for over 29 years, I am especially concerned about big corporations that pay their accountants rather than paying their taxes," said Representative Mark Pocan (WI-02). "Main street businesses play by the rules and pay their fair share continue footing the bill for offshore tax dodging corporations. This is exactly the sort of egregious corporate activity undermines the U.S. tax base and our economy and we urge the Administration to crack down on it."

The tax benefits of these corporate inversions could be denied if Treasury revises a Notice it issued in 2014 intended to remove costly tax breaks U.S. companies receive when they merge or invert with a foreign company based in a tax haven. Johnson Controls had $8.1 billion in offshore profits in 2015 on which it will likely be able to avoid paying U.S. income taxes should the proposed merger be completed.

"What Pfizer is doing to the American taxpayer is not only unfair, it's unpatriotic. Our country invests in research and innovation," said Congresswoman Jan Schakowsky. "We invest in education. Those public investments are major reason why companies like Pfizer find the workforce they need and develop new drugs. This new report from Americans for Tax Fairness shows how Pfizer takes advantage of all of this public investment, gouges consumers on drug prices and then seeks to move its profits overseas to avoid taxes while still reaping the rewards of public investment in the United States. This is simply unacceptable."

Thank you for your recent testimony to Congress regarding the President's Budget. We share your concern about the hemorrhaging of revenue from the current spike in inversions and agree with your testimony regarding the urgency of action to deal with inversions. Aware that Treasury will soon be promulgating regulations concerning this matter, we respectfully urge you to use all of your existing regulatory authority to address this issue. Prior Treasury guidance has not been successful in slowing inversions and no meaningful legislative response seems probable this year from Congress. We simply cannot wait, and your action can put a stop to this trend until a new Congress can act.

Specifically, we bring to your attention an article in this week's issue of Tax Notes from former Deputy Assistant Secretary for International Tax Affairs, Stephen Shay, with Professors J. Clifton Fleming Jr. and Robert J. Peroni. We agree with Mr. Shay et al. that Treasury has regulatory authority to adopt earnings stripping restrictions through regulatory action and that such regulations should be directed at all foreign-owned firms. Congress explicitly authorized the Treasury to "prescribe such regulation as may be necessary or appropriate to determine whether an interest in a corporation is to be treated for all purposes of the code as stock or indebtedness." (Internal Revenue Code Section 385) Treasury need only "set forth factors which are to be taken into account in determining with respect to a particular factual situation whether a debtor-creditor relationship exists or a corporation-shareholder relationship exists." One of these factors could be whether the interest was held by a related person that is not subject to U.S. tax, like a foreign corporation. See Rosenthal, "Professor Shay Got It Right: Treasury Can Slow Inversion," Tax Notes, September 22, 2014, p. 1447.

Additionally, we agree with Mr. Shay et al. that Treasury can and should expand its prior Notice 2014-52 limiting the ability of expatriating firms to use "hopscotch" transactions and to "de-control" their controlled foreign corporations in order to access their offshore earnings without paying the tax owed to the United States. We are concerned that Treasury's decision to limit its prior Notice to only those firms covered by Section 7874 has allowed companies like Pfizer and Johnson Controls to evade the restricts by structuring their deals just below the thresholds in that statute. Treasury's authority for addressing "hopscotch" loans (Section 956) and "de-controlling" strategies (Section 7701) is not in any way limited by Section 7874. We urge you to expand the reach of your prior guidance as you issue regulations to apply to all foreign ownership cases.

We appreciate your attention to these important issues and look forward to your response.

We write to request an update on the Department's plans to release further guidance on efforts to limit tax inversions and earnings stripping. In the wake of more and more corporations shirking their tax responsibility, we urge you to expedite your rulemaking process to stop these companies from abusing the U.S. tax system using tax inversion and earning stripping schemes.

Inversions are corporate tax deals that allow U.S. companies to move their tax domicile overseas -- but only on paper -- to avoid paying U.S. taxes. Because of weak earnings stripping rules, large multinationals can also concentrate their debt in U.S. subsidiaries and then claim huge interest deductions that strip out profits from the U.S without paying taxes. These schemes are deeply unfair to the American taxpayers that fund the programs and protections many corporations use to grow and thrive as they make significant profits. In return, these corporations choose to abandon their tax responsibility here at home, further eroding the U.S. tax base. In its Budget and Economic Outlook: 2016 to 2026 report released in January, the Congressional Budget Office projects that inversions and other tax-avoidance strategies will only increase, resulting in a significant decrease in corporate tax receipts over the next 10 years. Limiting the ability for these companies to engage in earnings stripping is an important step in limiting tax inversions and preserving the U.S. tax base and tax fairness.

In 2004, Congress acted to prevent these types of deals. 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. The Department's September 2014 announcement that regulatory action was forthcoming to reduce incentives or outright stop corporate inversions and earnings stripping was welcomed news. Since that announcement, a number of companies rightly abandoned their inversion efforts, but several companies continued to pursue inversion deals. We were pleased to see the Department issue further guidance to restrict inversions at the end of last year, but disappointed that earnings stripping, one of the main benefits of inversions, was not addressed in the November 2015 announcement, despite the Department having the authority to do so.

Last fall, it was reported that U.S.-based drugmaker Pfizer, Inc. is in ongoing discussions with Irish pharmaceutical company Allergan Pic about an acquisition that would, if successful, move Pfizer's tax domicile to Europe in the largest inversion deal to date. Earlier this year, manufacturing firms Johnson Controls and Tyco International, both with deep roots here in the United States, announced they plan to merge and house their global headquarters thousands of miles offshore in Ireland. As Congress continues to weigh reform of the nation's broken tax system, the seemingly endless tide of corporate inversions requires immediate action. While we applaud the Department for its work on this important issue, more must be done to put an end to these reckless practices. In particular, guidance on earnings stripping has yet to be issued despite Treasury's assurances.¹

In their article titled "Treasury's Unfinished Work On Corporate Expatriations" published this week, tax law scholars Stephen Shay, J. Clifton Fleming, Jr., and Robert Peroni point to another deal, the proposed inversion of fertilizer manufacturer CF Industries Holdings and Dutch manufacturer OCI N.V., as an example of the need for immediate executive action. CF's CEO W. Anthony Will has said as recently as December of last year that they will pursue this deal involving earnings stripping so long as that option is available. Analysts estimate that this one deal alone could cost the Treasury and taxpayers $800 million over the next decade.² Shay et al also points to Treasury's ability to prevent accumulated earnings from permanently escaping U.S. tax by addressing abusive hopscotch loans and decontrol transactions.

Therefore, we urge you to expedite your earnings stripping rulemaking process so that we can begin to restore some fairness to our tax system on behalf of the American people. If a company benefits from the United States and all that it has to offer, it should pay its fair share of taxes here at home.

² http://www.taxnotes.com/tax-notes-today/base-erosion-and-profit-shifting-beps/treasurys-unfinished-work-corporate-expatriations/2016/02/22/18245336