SEC Probes Pfizer Domestic & Overseas Reporting

The US Securities and Exchange Commission is trying to solve an accounting riddle - how is that Pfizer 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," write 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 (read here).

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. Although Pfizer has been criticized for repatriating offshore earnings and retaining those savings, while also laying off large number of employees.

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.

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 repatriated $25 billion and had $40.4 billion in offshore funds, and laid off 44,400 employees during the same seven-year stretch (back story).

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. “The geographical mix of revenues is not a good indicator of the split between domestic and international pretax earnings for purposes of financial statement presentation, especially for a multinational company that manages its operations on a global basis,” wrote Pfizer controller Loretta Cangialosi in a May 22 letter.

“We do not believe that disclosure regarding the reasons for the geographical split of pretax earnings would be meaningful or useful to investors," she continued. "Our approach is longstanding, well understood and, we believe, valued by the investment community" (see this). In 2009, according to the correspondence, Pfizer cut 9.4 percent from its tax rate by designating profit as overseas. And in 2011 the company reduced the rate 3.3 percent (there is another letter here).

A Pfizer spokeswoman told Bloomberg that the drugmaker conducts business "in more than 150 countries and face significant competition from companies located outside the United States, including many competitors located in lower tax jurisdictions. At all times and wherever we operate, Pfizer complies with the appropriate tax law.”

PFE Effective Tax Rate TTM data by YCharts