"Corporate Income Taxes in the 1990s", a report published by the well-respected Institute on Taxation and Economic Policy, found that because of a variety of tax breaks, Pfizer had the lowest federal corporate income tax rate of the ten pharmaceutical companies studied. (Information on the methodolology employed can be found at http://www.ctj.org/itep/corp00pr.htm.)
According to this study, Pfizer's corporate tax rate over the three-year period ending 1998 was just 3.1%, well below the pharmaceutical industry average rate of 18.6% and less than one-tenth the statutory corporate tax rate of 35%. In 1998, the last year of the study, only seven of the 250 companies studied had a lower tax rates than Pfizer. Despite earning nearly $1.2 billion, Pfizer received a refund from the federal government of $197 million, a negative 16.5% tax rate.
Pfizer's low effective corporate tax rate has played a substantial role in the company's earnings performance. If Pfizer paid taxes at the industry average tax rate, its earnings would be significantly lower. Yet shareholders understand very little about the details - and the risks - associated with corporate taxes. For instance, Pfizer derives significant tax benefits from stock option deductions, yet the treatment of stock options is presently under vigorous debate in the Congress and could change.
At the same time that Pfizer has been successful in avoiding corporate taxes, it has derived significant benefits from government investments in the success of its business. Government agencies often take the initial financial risks in evaluating new chemical substances for pharmacological properties. Pfizer also benefits from a strong system of intellectual property rights, funded by the government. Pfizer also counts the federal government as one of its largest customers because of the Medicare/Medicaid programs.
During times of national emergency and war, there has historically been a call for shared sacrifice. Pfizer may well be called upon to share in the sacrifice and to pay its fair share of the cost of operating the government on which the company depends for its success.
That shareholders request that the Board prepare a special report to shareholders, providing greater transparency on corporate cash taxes paid than is presently available in the Form 10-K or the annual report. Specifically, the report shall explain, in plain language, each tax break that provides the company more than $5 million of tax savings. This report, prepared at a reasonable cost and omitting proprietary information, shall be available to requesting shareholders, no later than August 31, 2003.
Relying on a low corporate tax rate to sustain high earnings entails political risks. As we continue in uncertain times, when corporations are coming under public scrutiny, it is possible that pressure to close corporate tax loopholes will emerge, putting Pfizer's earnings at risk. In addition, corporate executives are compensated based in part on earnings growth. We believe it would be helpful to shareholders to understand how much of earnings growth stems solely from successful corporate tax avoidance.
Please vote FOR this resolution.