insidecounsel.com ● January 2016
POLITICIANS AND THE PUBLIC were outraged when new York-based Pfizer announced its plan to merge with dublin-based Allergan and move its headquarters to ireland. Pfizer
was accused of being “unpatriotic” and the move was
called a “disgrace” and a “travesty.” But Pfizer said the
move made sense. it would enable huge drug maker to
take advantage of ireland’s lower corporate tax rate.
revenue but also to the demise of
future innovation. Government
tax breaks, offers of free or low-cost land and other incentives
are frequently used to encourage
companies to build factories in the
u.s. and stay put.
But labor costs are only part of
the equation. The high corporate
tax rate in the u.s.—the highest
in the industrialized world—has
become a major factor behind corporate flight.
To be sure, many u.s. companies find plenty of other loopholes
and don’t pay close to the oft-quoted 35 percent tax rate. Pfizer,
which earned $9 billion in profit
in 2014, paid a tax rate of about 26
percent on those earnings, according to its own reported financial
results. General electric co.
employs a number of aggressive—
and legal—strategies that have
greatly reduced the company’s corporate tax burden. And even trying
to figure out the tax rate Apple inc.
pays is not easy. Two years ago,
Apple ceo Tim cook estimated it
was about 30. 5 percent, whereas
The New York Times put it at
closer to 8. 2 percent.
But increasingly, u.s.
companies that operate globally
are tempted to relocate some of
Pfizer’s plan is an example of
one of several legal tax schemes
employed by u.s. companies
seeking to lower their tax bur-
den. But it is hardly the only one.
corporations have found ways to
park billions of dollars in earnings
offshore to avoid the high u.s. tax
rate. And while lower taxes may
be good for a company’s bottom
line, it is not good for the u.s.
Treasury. in fact, this has become
such a big problem that and even
before Pfizer announced its plan,
members of congress had started
to draft legislation that would give
companies an incentive to keep
their profits at home and make
the u.s. a more attractive place to
so these lawmakers are looking
into the feasibility of establishing
a tax incentive policy commonly
known as the “patent box” or
“innovation box.” This system
would subject companies to a
much lower tax rate on income
earned from intellectual property. instead of the u.s. rate of
35 percent, a company might,
for example, pay between 5 and
15 percent on all income derived
from patents, trademarks, copyrights and any other iP.
“it’s a mechanism to reward
innovation and to keep high-tech companies in the u.s.,”
says lori Johnson, a partner at
chamberlain, Hrdlicka, White,
Williams & Aughtry who specializes in intellectual property.
For years, u.s. manufacturers have been migrating overseas,
lured largely by lower labor and
production costs. The government has tried to stem this flight,
fearing the loss of industry could
lead not only to the loss of tax
taxing IP at a lower rate
The move is aimed at stalling “inversions” and keeping
U.S.-based companies from moving to Europe.
to keep high-
in the U. S.”