STEVE INSKEEP, HOST:
And let's focus on the latest big corporation that may be cutting its U.S. tax bill - the giant pharmaceutical firm Pfizer is in talks to buy a company called Allergan. That company's based in Ireland and as part of the deal, Pfizer would move its legal headquarters to Ireland, which has lower tax rates. This is called tax inversion and companies are doing it more often. In fact, it's not even the first time that this particular Irish firm has been used in this way. David Wessel is following this story. He's director of the Hutchins Center at the Brookings Institution, also contributes to The Wall Street Journal. David, good morning.
DAVID WESSEL: Good morning, Steve.
INSKEEP: How much is this inversion happening?
WESSEL: Well, it started in the early '80s when some smart tax lawyers figured out that they could do this. Since then, about 50 U.S. companies have reincorporated abroad in an inversion - 20 since 2012.
INSKEEP: Wow.
WESSEL: Ireland's particularly popular 'cause its tax rate is 12.5 percent compared to our 35 percent rate. The U.K. is another because they've recently cut their rate to 20 percent.
INSKEEP: Well, I think you've just hit on some numbers that suggest the motivation here. You can actually pay billions of dollars less in taxes if your tax rate goes from 35 to 12 percent. That's what we're talking about here, right?
WESSEL: That's right. So basically the U.S. statutory tax rate for companies is 35 percent, although a lot of companies find ways to pay less than that. The U.S. taxes all of a multinational company like Pfizer's profits. Other companies tax only the profits earned in that country. And those foreign profits are taxed only when they're brought back to the United States. American companies have $2 trillion in taxes parked overseas. And if they go through this inversion, they can use them more freely. And I think what's happened is a lot of companies are noticing that a few companies have done this and they're all saying to their executives, well, if they can save money on taxes, why can't we? And besides, if we don't, we're vulnerable to some foreign company coming and buying us and doing it to us.
INSKEEP: Wow, well, does anything really change, though, about a company or its operations or where things are located other than where they say the headquarters is?
WESSEL: No. The businesses in the companies stay the same. The CEOs almost always continue to live and work in the United States. I mean, it's a reminder that some of the most eyebrow raising ways to cut your taxes are the ones that are legal, not the illegal ones. Now, originally, all you had to do was say I'm moving and that was it. They passed a law in 2004; there was some new Treasury regs. Now it's a little more complicated. You have to buy some foreign company and has to be reasonably large foreign company in order to do it. That's, for instance, how Burger King became Canadian. It bought Tim Hortons and, voila, it's now Canadian.
INSKEEP: Well, this Irish company that is now called Allergan hasn't always been called that. And hasn't it been used before in this very same way?
WESSEL: Absolutely. This is just a wonderful case study. So back in 2012, an American company called Watson Pharmaceuticals buys a Swiss company and moves to Switzerland. Then that Swiss company in 2013 buys an Irish company and shifts its headquarters there. Earlier this year, the Irish company buys an American firm and adopts the American firm's name, Allergan. OK, you with me so far?
INSKEEP: Oh, sure, absolutely (laughter).
WESSEL: Now, here comes Pfizer. It's a company founded in Brooklyn in 1849, still headquarters in New York, makes Advil and Viagra and Chapstick and a number of other products. It flirted with buying a European company last year - didn't work out. Now it's trying again to buy Allergan. If it goes through, it becomes Irish and saves money on its taxes.
INSKEEP: Wow. OK, David, thanks very much for talking us through that.
WESSEL: You're welcome.
INSKEEP: That's David Wessel with the latest on tax inversions. He's director of the Hutchins Center at the Brookings Institution and writes for The Wall Street Journal. Transcript provided by NPR, Copyright NPR.