Dive Brief:

The pending merger between Pfizer and Allergan could allow Pfizer to avoid paying up to $35 billion in taxes on overseas earnings, as well as its previously deferred tax liabilities, a ccording to a new report from Americans for Tax Fairness.

ccording to a new report from Americans for Tax Fairness. Pfizer has previously reported $21.2 billion in cumulative deferred tax liability with the SEC for 2014. The report uses this figure to calculate Pfizer holds $74 billion in unreported offshore profits. Additionally, Pfizer reportedly owes another $14 billion on earnings reinvested permanently offshore (net of foreign taxes paid).

A Pfizer spokeswoman told Bloomberg the merger with Allergan is not designed to move jobs out the U.S., but rather create a global, more R&D focused company.

Dive Insight:

The pending reverse merger with Allergan could allow Pfizer to lower its tax rate from about 25% to roughly 17% or 18% by moving its tax domicile from the U.S. to Ireland. Althought the Obama administration has made efforts to prevent U.S. companies from moving their tax base oversease, the Pfizer-Allergan team is confident the pending merger will clear regulatory authorities.

Recently, a $40.5 billion divestment of Allergan's generics portfolio to Teva cleared one regulatory hurdle in the E.U. This will likely aid Pfizer and Allergan in their merger's regulatory review.

In the report, the national coalition Americans for Tax Fairness (ATF) criticizes Pfizer for aggressively raising prescription drug prices while concurrently aiming to lower the amount of taxes it pays to the U.S.

"The Obama Administration and Congress should act immediately to remove the tax breaks that make Pfizer's merger so attractive and to block other companies from completing inversions that are nothing more than a tax dodge," the group said in the report.

The ATF calculated the $35 billion figure by first estimating Pfizer's total offshore profits. Pfizer has publicly disclosed to the SEC $74 billion in "permanently revinested earnings," or earnings indefinitely invested abroad. Pfizer would normally owe $13.9 billion on those earnings, net of foreign taxes paid, according to ATF.

Additionally, Pfizer has estimated it would owe $21.2 billion on unremitted earnings of another $74 billion, if the company decided to repatriate them to the U.S. Combining the two figures results in roughly $35 billion in taxes it would potentially have to pay.

The ATF analysis did not take into consideration the possibility the U.S. government may choose to extend a repatriation holiday to corporations with off-shore earnings. The last time this happened was in 2004, when Congress granted a repatriation holiday with a 5.25% tax rate. At that point, Pfizer brought home $35.5 billion in foreign earnings.

It is important to note, however, that even if Pfizer did not merger with Allergan it would not need to immediately repatriate its offshore earnings.

This post has been updated to better explain the math behind the $35 billion figure claimed by Americans for Tax Fairness.