Bloomberg/New York


If Pfizer succeeds in buying Allergan - and avoids billions of dollars in taxes - it can give a tip of the hat to a Northern Irish pharmacist named Allen McClay.
In 1968, McClay started a drug company in Craigavon, a half-hour’s drive from Belfast. Not one to stand on ceremony, he sometimes held employee meetings while he peeled potatoes in the company kitchen. After McClay took his Galen Holdings public in 1997, he became one of his country’s most active philanthropists and was knighted by the Queen.
But his company may have a bigger impact than McClay, who died in 2010, ever would have guessed. Galen has turned into a vessel that has allowed four successively larger American drug companies to pull their operations out from under the US tax regime. Pfizer, the world’s largest drug company, could be the fifth to renounce its US corporate citizenship and reduce its corporate taxes.
How a small drugmaker in Northern Ireland could poke such a hole in the US Treasury illuminates the bizarre US corporate tax system. It allows foreign-owned multinational companies operating in the US to pay lower taxes than domestically owned ones. Since 2004, most US companies have been prohibited from simply declaring themselves foreign to erase the disadvantage. Instead, many of them are buying a foreign address through a merger abroad, in transactions known as inversions.
The dealmaking began not long after McClay left Galen Holdings in 2001. The chief executive officer, Roger Boissonneault, carried out a leveraged buyout and switched the company’s legal address from Craigavon to Bermuda and then to Dublin, in the tax-friendly Republic of Ireland. Meanwhile, he ran the company from New Jersey.
In 2009, Boissonneault struck a deal to buy a drug business from Ohio-based Procter & Gamble Co that more than doubled the company’s size - while cutting the P&G unit’s tax bills.
Then in 2013, he sold the company to Actavis, based not far away from his offices in New Jersey. Although Actavis was bigger, it was able to adopt the Irish address - and low tax rate - under US tax rules.
Over the next two years, Actavis made two other big US deals, acquiring Forest Laboratories and Allergan, the maker of Botox. Between the two of them, the deals more than doubled Actavis’ sales again. And they generated about half a billion dollars of annual tax savings. The combined company is now known as Allergan.
How could companies save so much just by becoming Irish? The US has the highest corporate tax rate in the developed world - 35% - combined with an unusual policy of taxing the income of US companies’ foreign subsidiaries. Foreign- owned companies can minimize US taxes by keeping their US operations separate from the rest of their corporate structure; US Corps don’t have this option. Many companies that invert choose Ireland, with its lower corporate income tax rate of 12.5%, or the UK, which doesn’t tax foreign earnings.
It’s unclear what terms are under discussion, but it’s likely that New York-based Pfizer, the bigger company, would adopt Allergan’s Irish address.
An analyst estimated that a similar deal proposed by Pfizer last year to become British would lower its tax bill by about $1.4bn a year. Spokesmen for the two companies declined to comment.
When McClay retired in 2001 and sold his stake, he said he was dismayed by a new focus on the US market and job cuts in its Northern Ireland operation. According to the Financial Times, he called the decision “as easy as taking off dirty socks.” Those socks turned out to be quite valuable, on American feet.