The pending merger between Pfizer and Allergan would create the world's largest drug manufacturer. It's also renewed the controversy over U.S. companies moving overseas. Under a practice known as tax inversion, Pfizer would save billions of dollars a year in U.S. taxes by shifting its headquarters to Ireland. Bret Wells teaches tax law at the University of Houston Law Center. He joins Andrew Schneider on this week's Bauer Business Focus.
How does tax inversion work?
"What is achieved is that a new parent company...is incorporated in another country, typically a low-tax jurisdiction, and that company acquires all of the stock of what used to be the publicly traded parent company that was a U.S. company."
What has the role of Houston companies been in the spread of this practice?
"In 2002, there were a number of Houston companies that engaged in inversion transactions – Cooper Industries, Weatherford, Nabors, to name a few. Those were naked inversions. They were done solely for the tax inversion benefits. In response, Congress enacted legislation ... that prevented that particular inversion technique, and said now inversions either must be done to a country where a company has a substantial business presence economically or is part of an acquisition where the legacy U.S. shareholders own less than 80 percent of the combined company.
What's the benefit to the U.S. of having a law that allows something like that?
"There really is no benefit, in my view, but the rules originally came about to say that we should be a friendly jurisdiction for passive investors, so that people can earn rents and royalties and interest in the U.S. without a significant U.S. tax."
If there are no actual benefits, why is it so difficult to change the law?
"The way I've written about it ... is we've used whack-a-mole tax policy. We don't like a particular inversion, so we enact a law to stop those inversions. But the financial incentives are still in place to engage in inversion transactions, and so ... smart capital investors will then look at new ways to go around the new law... Once we recognize that we are allowing U.S. operating profits to escape U.S. taxation even though they were earned in the United States ... then the U.S. needs to prevent that from happening [through broad-based tax reform]."