SEC Asking Pfizer About Accounting That Keeps Profits in Lower-Tax-Rate Countries

The US Securities and Exchange Commission is trying to solve an accounting riddle – how is that Pfizer (PFE) was able to record big overseas profits but losses in the US when 40 percent of its sales are generated in foreign countries? Over the past few months, the agency and Pfizer have engaged in correspondence over the issue, which ultimately may determine whether Pfizer has a bigger tax bill to pay.

In a May 9 letter filed late last week, the SEC asked the drugmaker to explain why earnings before taxes outside the US were $15 billion in 2011, while losses within the country were $2.2 billion. By piling up profit in low-tax jurisdictions overseas, Pfizer has been able to cut its tax rate reported to investors and boost results, writes Bloomberg News, which first reported the SEC inquiry.

“These operating results appear to be inconsistent with your domestic and international revenues, which in 2011 were $26.9 billion and $40.5 billion, respectively,” writes Jim Rosenberg, an SEC senior assistant chief accountant. He also questions investments in debt securities and certain contractual obligations, such as pension benefits, that appear to be omitted from the balance sheet.

As Bloomberg also notes, Pfizer is one of the most aggressive US companies reporting income in countries with lower tax rates than the US in order to shave its tax rate, according to data compiled by the news service. The drugmaker had the second-highest amount of profit kept overseas, $63 billion, according to securities filings as of March, Bloomberg writes.

Moreover, Pfizer is also among the companies that have lobbied lawmakers for a tax holiday that would allow it to bring some of the overseas profit back to the country at a lower tax rate.

The Institute for Policy Studies finds the 2004 tax holiday enabled 843 companies to reduce tax rates from 35 percent to just over 5 percent. These companies repatriated $312 billion in profits, while avoiding about $92 billion in federal taxes. And 58 companies, which accounted for almost 70 percent of all funds repatriated, slashed nearly 600,000 jobs while saving an estimated $64 billion in taxes.

PFE Cash and ST Investments data by YCharts

Drugmakers, however, were singled out as prime beneficiaries. Pfizer repatriated $40.1 billion in 2004 and 2005 and, as of 2010, had $48.2 billion in offshore funds, while laying off 58,071 people between 2004 and 2011, according to the study by the think tank. Merck (MRK) repatriated $25 billion and had $40.4 billion in offshore funds, and laid off 44,400 employees during the same seven-year stretch (see Pharma news).

In its response to the SEC, Pfizer wrote that providing more information about how it distributed its earnings among various locations would not be helpful to investors.

To read the remainder of this article, go to Pharmalot.

Ed Silverman is the editor of Pharmalot and a contributor toYCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

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