Thursday, October 6, 2016

An Update: Has Pfizer's Off-Shore (Non-US Tax-Haven) Retained Cash Hoard Recently EXPLODED -- To Almost $200 Billion[?]

[Occasionally we talk tax policy here. Please forgive us.] UPDATED @ 1 PM EDT: I am now fairly curious as to how this non-partisan think tank arrived at the $193 billion figure attributed to Pfizer below. The report quite accurately quotes Merck's most recent (2015) year end SEC Form 10-K for the figure it uses; and it quotes the analogous figure for Apple, also accurately -- from that company's SEC Form 10-K. Oddly, though, at year end 2015, Pfizer showed "only" an $80 billion figure (at page 91 footnotes), not the $193 billion claimed by the report I've quoted below. I'll keep digging, but it could be that the report isn't comparing "apples to apples", as to the Pfizer figures. Or (less probably) it could be that the two failed inversions Mr. Read attempted in 2014 to 2016 somehow led it to create additional shelters, off-shore (ones we will only see in March of 2017, when its 2016 SEC Form 10-K is filed). [Moreover, I am not aware of any easy way to move earnings off-shore, by selling one's HQ -- and moving just a few blocks away, inside Manhattan -- as Mr. Read announced he will, here in late 2016.] In any event, I'm on the hunt, and will report back -- right here. FINAL UPDATE: The Senior Policy Analyst has answered my questions, to my satisfaction -- and so the original post below stands, in full. There is no footnote source for that Pfizer figure, so I have a call into the editors of the report -- to get an explanation. [End, updated portion.]

If the report is accurate, that Pfizer figure is certain to be over $200 billion at year end 2016 -- almost a fifth of a trillion dollars. To be fair, Merck is now holding a little over $70 billion (not small potatoes!) in a similar fashion. But proportionately, Pfizer is NOT three times Merck's size (no, it is only about a third larger than Merck). And proportionately, Apple dwarfs Pfizer on market cap -- yet Pfizer is only about 20 per cent behind Apple, in the hoarding of foreign cash reserves. Consider that at year end 2014, this amount for Pfizer was only $74 billion (page 81, footnotes) -- and now, about 20 months later -- it is going to be over $200 billion. That's a major inflation, without some underlying new mega-blockbuster coming on line (as an economic explanation) for Pfizer, to boot (in comparison to Merck's Keytruda® launch during the same period -- none for Pfizer).

My thesis then, is that Pfizer (under UK chartered accountant/chairman Ian C. Read's leadership) may be playing the "patent holdco paid a foreign license fee strategem" just a little too close to the edge of the envelope. In order to pass US tax muster, a multinational like Pfizer, Apple or Merck must be able to show the IRS that the patent license royalties paid to the foreign patent holdco (in truth, just another of Pfizer's controlled companies, in this example) -- for its patents on drugs like Xeljanz® -- is a fair market value rate.

Wishing to be careful, and prudent here -- most public companies are fairly conservative about declaring the vast tax advantage of not having to pay US corporate income taxes on the funds expensed in this manner, as patent "royalties", to their foreign holdcos -- and tend to choose the low end of the range of FMV rates, for such patent license royalties. Not so Pfizer, it would seem.

This is my conjecture (to be clear), and operating thesis -- because no law requires disclosure of these intra-company royalty rates. So we cannot know, for certain. But it seems unlikely that a company only modestly larger than Merck, operating in almost all the same US and foreign markets, in the same industry, could generate such a run-up in foreign cash, without having bumped up these patent royalty rates. Doubly so, when Pfizer's cash off-shore so quickly is "catching up to" the Apple level. Apple's tech supports very high royalty rates. But I am less than certain that Pfizer's drugs on patent are as valuable, on a per dollar of sales basis, as Apple's tech patents.

It is the top-end -- and bottom-end "gap" -- between the three companies that feeds my conjecture. I'd love it if someone could offer a contra case, in favor of Pfizer. I very much doubt such a case can credibly be made. But do consider the above analysis an earnest, and friendly, offer of scientific challenge: please prove me wrong. Please.

Finally, to be clear, I do not agree with all -- or perhaps even most -- of the conclusions reached in this non-partisan report, but it does accurately set out the scope of the tax problem our next Administration simply must address in a thoughtful, non-punishing way.

That is, we need for Merck, Apple and Pfizer to use these cash hoards to invest in the US -- by encouraging (with tax reform) the return of this capital -- not free of tax, but in a graduated manner to feed our own US economy. Here's the report quote (on page 3) that set me to writing all of the above(!):
. . . .Pfizer, the world’s largest drug maker, operates 181 subsidiaries in tax havens and holds $193.6 billion in profits offshore for tax purposes, the second highest among the Fortune 500. Pfizer recently attempted the acquisition of a smaller foreign competitor so it could reincorporate on paper as a "foreign company." Pulling this off would have allowed the company a tax-free way to avoid $40 billion in taxes on its offshore earnings, but fortunately the Treasury Department issued new anti-inversion regulations that stopped the deal from taking place. . . .

So, it is high time for the adults in the room -- that does NOT include you, Mr. Trump(!) -- to discuss US and international corporate tax schemes with fresh eyes, under HRC in 2017 (here I did like the 2014-era "Colorado Compromise" suggestion). We need solutions, not more gaming -- like the Trumpkin's $916 million paper loss, that let him (in all likelihood) avoid paying any federal income taxes on his billions, for over 20 years. Now you know. And I am smiling widely, on a softly raining, warm Fall morning walk in. . .


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