Why is the SEC Questioning Pfizer?

In a letter filled with the Securities and Exchange Commission on Friday, regulators asked the world’s biggest drugmaker, Pfizer (NYSE:PFE), how it recorded high profits overseas but losses at home when 40 percent of its sales were inside the U.S.

An original letter dated May 9, obtained by Bloomberg, asked the New-York based company why earnings before taxes outside the United States were $15 billion in 2001 while losses within the country were $2.2 billion.

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By placing profit in low-tax jurisdictions overseas, Pfizer has been able to cut its tax rate.

“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,” wrote Jim Rosenberg, the commission’s senior assistant chief accountant, in the letter.

In response to the commission, Pfizer said that giving more information about its earnings distribution 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 Loretta V. Cangialosi, Pfizer’s controller.

According to the correspondence, Pfizer reduced its tax rate by 9.4 percent in 2009 and 3.3 percent in 2011.

Pfizer has paid all the taxes its legally obligated, company spokeswoman Joan Campion told Bloomberg. She also stated, “We conduct 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.”

A further letter from Pfizer to the SEC dated August 27, made the situation more clear; it included a line which said, “the jurisdictional location of earnings is a significant component of our effective tax rate each year as tax rates outside of the U.S. are generally lower than the U.S. statutory income tax rate.”

While Pfizer may one of the most aggressive U.S. companies when it comes reporting income in countries with low tax rates, it is by no means the only company. Google (NASDAQ:GOOG) drew questions from the SEC last December and both Microsoft (NASDAQ:MSFT) and Hewlett-Packard (NYSE:HPQ) were investigated by the Senate’s Permanent Subcommittee on Investigations for tax evasion in September.

According to SEC filings, Pfizer kept the second highest amount of profit overseas, $63 billion, second only to General Electric. It is also one of several companies to lobby U.S. lawmakers for a tax holiday that would allow it to bring some of its overseas profit back to the country at a lower tax rate. Republican presidential nominee Mitt Romney argued for such a holiday in Wednesday night’s debate.

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