Icahn: Change the international tax code, and Pfizer will drop its 'travesty' of a merger

Carl Icahn

The tax benefits of buying Allergan ($AGN) are Pfizer's ($PFE) No. 1 reason for doing the $160 billion deal. In fact, some analysts see the $2 billion in potential tax savings as the merger's only substantial advantage.

Activist investor Carl Icahn is one of those detractors, and on Monday, he amped up the criticism.

"The Pfizer-Allergan deal is a travesty," Icahn wrote in a New York Times op-ed. "The point isn't to find corporate synergy. It is to leave behind our uncompetitive international tax system."

But what if those tax savings were moot?

That's exactly what Icahn is advocating, in a push that is at least partly self-serving, as a corporate tax cut would be to any big investor. Overhaul the part of the tax code that's prompting Pfizer's tax-inversion move, Icahn suggests, and CEO Ian Read might drop the idea altogether.

New York Sen. Chuck Schumer and Ohio's Rob Portman have proposed a change to the tax rules governing overseas earnings. Right now, the U.S. taxes earnings wherever they're booked, which is why multinational pharma companies funnel their patents to low-tax jurisdictions and keep the resulting earnings offshore, regardless of where the drugs were actually sold. It's a tax-avoidance strategy that keeps the industry's overall tax rate much lower than the nominal 35% that American companies are so fond of citing.

Under Schumer and Portman's plan, companies with cash stuck overseas could bring it back to the U.S. at a reduced rate of 8% to 10%. The idea is backed in the House by Speaker Paul Ryan and Kevin Brady, chairman of the Ways and Means Committee, Icahn says. (He calls the current tax approach a "double tax," but the taxes pharma companies pay overseas are deductible for the IRS.)

U.S. companies have been lobbying for that idea for some time, with Big Pharma a major part of that effort. In the past, Congress declared a "repatriation holiday" that allowed that cash to come to America at low cost to the companies that booked those sales in foreign countries to avoid taxes in the first place. Companies have been expecting--and pushing for--another holiday for several years.

Pfizer CEO Ian Read

Read says his Allergan buyout could have been prevented if Congress had "fixed" the tax code. "I personally have been to Washington for the last two years," Read said (as quoted by Icahn). "I have tried to get this as an urgent issue that we need to fix, and I have been totally unsuccessful."

If Congress jumps on the Schumer/Portman proposal, Icahn figures that Read would pay the hefty breakup fee--up to $4.5 billion, according to some reports--that would be necessary to walk away from the Allergan deal. Read could collect his tax savings at its U.S. headquarters instead.

That would make Read's years-long quest for an inversion deal into a creative lobbying effort--one that would benefit plenty of Read's fellow pharma executives. According to the Center on Budget and Policy Priorities, of the top 15 companies repatriating funds in the previous tax holiday--a total of $150 billion--6 were pharma companies. And under the new "international tax reform" proposal, this wouldn't be a holiday. It would be permanent.

Presidential candidate Hillary Clinton has a different plan, which would create an "exit tax" on companies moving their headquarters overseas. The proceeds would be used to rebuild the U.S. manufacturing base, aiming to create new jobs in the sector.

- see the NYT op-ed

Special Reports: The top 15 pharma companies by 2014 revenue - Pfizer | Pharma's top 10 M&A deals of 2014 - Actavis/Allergan - Actavis/Forest Laboratories

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