U.S. corporations park billions overseas
It's been three months since Pfizer bid unsuccessfully for the big British pharmaceutical company, AstraZeneca.
In the spring of 2014, U.S. pharmaceutical giant Pfizer tried to buy British pharmaceutical giant AstraZeneca for $116 billion. In May, the bid was rejected. U.K. politicos objected on economic nationalism grounds, while some AstraZeneca investors considered the offer too low. Under U.K. takeover rules, Pfizer can make another run at AstraZeneca starting on August 26.
Even if Pfizer doesn’t succeed in acquiring AstraZeneca, Pfizer CEO Ian Read has said he is "aggressively" seeking other acquisitions — Ireland-based Actavis is said to be a possible target. If Pfizer were able to become a foreign-based company, and shift its domicile to the U.K. or Ireland, it would be able to bring home as much as $30 billion in international profits without being subject to the 35 percent U.S. corporate tax rate on that money, says Martin Sullivan, chief economist at TaxAnalysts.com. (Sullivan points out that Pfizer would likely pay a lower tax rate in actuality.)
“Part of the allure is to get into lower-tax countries,” says Sullivan. "Like the U.K., with 21 percent, and Ireland, with 12.5 percent.”
Major American companies — including GE, Johnson & Johnson, Merck, Pfizer, Google, Cisco, Microsoft and Apple — are estimated to have nearly $2 trillion parked outside the U.S.; profits from international operations and investments. They use the money to buy foreign companies and factories.
Or, it just sits in the bank, says Brad McMillan, chief investment officer at Commonwealth Financial.
“You can make an argument that shareholders would be better off if the money was brought home, taxes were paid, and it was distributed, or put to use in the business," says McMillan.
McMillan says companies could pay higher dividends to shareholders, or build new factories in the U.S. But he says that’s unlikely, until U.S. corporate tax rates come down. And he thinks that is a political long-shot, at least until the 2016 presidential election.