- New Jersey: Lawmakers Considering Legislation that Punishes Corporate Inverters
- December 29, 2015 | Authors: Chad Arfons; David H. Godenswager; David M. Kall
- Law Firm: McDonald Hopkins LLC - Cleveland Office
Late last month, the pharmaceutical behemoths Pfizer and Allergan announced the completion of their $160 billion merger plan “to form the world’s biggest drug company by sales, in a deal that is mostly, if not exclusively, about tax,” reported Fortune Magazine. An Allergan press release disclosed that under the terms of the deal, the businesses will be combined and renamed “Pfizer plc,” and will trade on the New York Stock Exchange using the PFE ticker. The new company will maintain Allergan’s legal domicile in Ireland, locate its principal executive offices in Dublin, but base its global operations in New York.
Noting that the portfolio of drugs include the well-known Botox and Viagra, along with a pneumonia vaccine and treatments for Alzheimer’s and rheumatoid arthritis, Fortune characterized the merger as “the largest so-called inversion deal ever.” The deal allows U.S.-based Pfizer to reincorporate overseas and avoid U.S. tax liability while remaining, for all other intents and purposes, an American company.
Allergan operates its administrative headquarters out of Parsippany, New Jersey. Incensed by “handouts to wealthy corporations that avoid tax obligations,” New Jersey Sen. Shirley Turner has been working to prevent taxpayer funds from being used to subsidize companies that engage in tax-avoidance schemes, like inversions.In a mid-September press release, the senator quoted a study by the U.S. Public Interest Research Group revealing that states lost more than $39 billion in tax revenue in 2011, and that New Jersey was among the top five losers.
To stop this, the senator introduced S-2361, most recently amended on Dec. 7, 2015. This act would render an inverted domestic corporation ineligible for various types of financial aid, like state economic development grants and reimbursement of taxpayer-subsidized programs, such as Medicaid.
In addition, the legislative language now precludes inverters from receiving development contracts. To this end, it requires any applicant for a development subsidy to provide a standing certificate attesting to the legal status of the applicant, among other things. The language also now obliges any corporate recipient of a development subsidy that becomes an inverted domestic corporation during the term of a development subsidy to pay back the total value of the development subsidy.
Sen. Turner has also introduced legislation to prohibit the state’s pension board from investing in companies that have exploited the inversion tax loophole.
In reporting on the merger, Bloomberg recognized that New Jersey may be the first state to punish inverters. However, Gov. Chris Christie and other state Republicans oppose such prohibitions, preferring to deter overseas moves by lowering taxes. This is a position at odds with the Democratic controlled Senate that could result in a show down. Bloomberg notes that Dublin’s corporate tax rate is 12.5 percent, versus the 35 percent tax rate in the U.S.
New Jersey has awarded Pfizer with $48.28 million in various incentives, according to Sen. Turner. Bloomberg quoted her as wanting to “send a strong message to Pfizer as well as any other corporate deserters looking to do the same thing... They are parasites living off of our taxpayers, and it’s not like they’re going bankrupt by any means.”