With Pfizer-Allergan Deal on the Line, Congress May Take On Inversions

Congress may try, but likely won’t act on inversions quickly enough to stop Pfizer and Allergan from creating the largest ever pharmaceutical company this year.

The November announcement that Allergan would purchase Pfizer in an inversion-like merger by moving Pfizer’s address to Dublin while maintaining its primary operations in the U.S. reinforced the need to address the corporate maneuver, several lawmakers have said since. But the volatility of an election year will make it nearly impossible to pass legislation addressing any sort of tax reform, several experts say.

“The legislative and executive branches have been unable to get together for the last several years on any form of tax reform,” said Steve Rosenthal, a senior fellow at the Tax Policy Center, a joint project of the Urban Institute and Brookings Institution. “If anything, the election year just makes it more difficult, even more remote.”

That doesn’t mean lawmakers won’t make a go of it anyway. Rep. Kevin Brady (R-Texas), chairman of the Ways and Means Committee, says he hopes to advance an international tax reform bill through the House this year. He said he has followed the steps of his predecessor, now-Speaker Paul Ryan (R-Wisc.), and is opening up discussions again with Sen. Chuck Schumer (D-N.Y.) about taking on international tax reform as a precursor to a more comprehensive overhaul.

Members will discuss their priorities for tax reform at the GOP retreat in Baltimore this week, and Ways and Means committee members will meet later this month, Brady said Thursday in an interview. To address inversions, lawmakers have to lure companies back to the U.S., he said.

“One significant way is to allow our U.S. companies that are competing around the world to bring those profits back to be invested in the United States where it makes good economic sense for them,” Brady said. That adds urgency to the push to address these business deals.

“Unless there’s consensus on some type of innovation box that sends a clear signal to the technology, pharmaceutical and other types of industries that this is the place – this country is the place to make those investments – and we lower those overall business rates, the tax code still is going to encourage companies to invest overseas and move overseas,” Brady told Morning Consult.

Sen. Orrin Hatch (R-Utah) said last month that lawmakers would have to lower corporate tax rates to be more competitive with other countries, adding he’d like to see the U.S. lower the rate from 35 percent to around 20 percent.

“Unless we do that, we’re not going to solve that problem,” Hatch said.

As chairman of the Senate Finance Committee, Hatch would be one of the key lawmakers to move legislation forward. Bills introduced by Democrats haven’t gotten committee hearings in either of the Republican-controlled chambers this Congress.

But while Hatch wants to lower corporate tax rates, Democrat Dick Durbin of Illinois, who serves as the Senate minority whip, said he thinks lawmakers from both parties would come around to his point of view to close the legal loopholes that allow inversions when faced with a vote. Durbin said he hopes it comes up as part of tax reform.

“Slowing down inversions, if not stopping them, is a popular position. It’s not an unpopular position,” Durbin said. “And it also intuitively makes sense that instead of pushing the burden on other companies and individuals, these companies have to face their corporate patriotic responsibility.”

Durbin and Sen. Jack Reed (D-R.I.) and Reps. Sander Levin (D-Mich.) and Lloyd Doggett (D-Texas) introduced legislation in January that would treat a combined foreign company as a domestic corporation if the historic shareholders of the U.S. corporation held more than 50 percent of the foreign company, or if the affiliated group is managed and controlled in the U.S.

Levin said the proposed Pfizer-Allergan merger “highlighted the need for action.”

“It’s so huge,” he told reporters. “And it illustrates what the problem is because they are going to essentially maintain their operations here while they change their address.”

Congress will feel some pressure to stop the deal, which is subject to regulatory clearance in the U.S., European Union, and some other countries, as well as shareholder approval. Frank Clemente, executive director of Americans for Tax Fairness, said pushing lawmakers to pass some sort of moratorium on inversions until comprehensive tax reform can be passed would be his primary focus at the start of this year. To stop the merger, Congress would need to act in the first half of this year, he added.

“That’s the incentive for me,” he said. “It’s a huge incentive.”

But it probably won’t be enough.

Even with the attention the pending Pfizer-Allergan merger has received, unless several more major inversions are announced in the coming months, it’s unlikely anything substantive will happen on this front, said Cathy Schultz, a vice president at the National Foreign Trade Council.

“They can’t change a lot of stuff that companies are looking at to lower the corporate rate by doing inversions, so without tax reform, Congress really cannot act like a one-off deal,” she said.

Recent treasury regulations address some questions about inversions, and forthcoming regulations could address tax reform, she said, but the only way to truly change the pattern is through congressional action.

Politically, it’s going to be challenging for lawmakers to address any type of tax reform without taking a more comprehensive approach, Schultz said.

“If you just do corporate tax reform, it’s very hard for members to go back to their constituents and say ‘We gave tax breaks to large, multinational corporations but nothing for you, the voters, who are going to elect us,'” she explained.

“To do corporate tax reform properly, you’re going to have to do comprehensive tax reform,” she said. “Because otherwise you’re not going to be able to get the rate lower, and if you don’t get the rate lower, it loses some of the benefit of doing corporate tax reform.”

Morning Consult