Washington | The tax-driven reverse merger of American pharmaceutical giant Pfizer and Dublin-based Allergan to create the world's biggest drug firm is a timely reminder to Australian policymakers that they need to ensure the corporate tax system is internationally competitive. 
Pfizer joins dozens of US firms fleeing the country's penal business tax system that charges a rate of up to 39 per cent on worldwide income, comprising federal and state corporate income taxes.
For a medium sized, capital-importing economy such as Australia, it is an opportune time to reinforce that capital in a globalised world is increasingly mobile and firms will relocate to where they can make the best after-tax returns for shareholders.
Under the tax "inversion" deal worth up to about $US155 billion unveiled on Monday, Pfizer will shift its corporate citizenship to low-tax Ireland, despite 56 per cent of shares in the new company belonging to US-based Pfizer shareholders. The merged company will trade on the New York Stock Exchange.
Even though the US Treasury will miss out on billions of dollars in tax revenue when Pfizer redomiciles, Pfizer chief executive Ian Read said the transaction was a "great deal for America" because the firm would continue to invest $US9 billion and employ 45,000 people in the US.
The Obama administration has taken incremental administrative attempts to block the wave of US companies like Pfizer, Burger King and a host of pharmaceutical firms involved in cross-border tax deals from escaping the US tax net.
The US government has had little success because the Treasury and Congress have failed to strike at the heart of the problem; an internationally uncompetitive tax code imposing high rates and incentivising firms to shift and stash profits in low-tax jurisdictions.
The political class in Canberra, business leaders and unions appear to be engaging in a healthy debate about the future of the country's tax system, including corporate tax.
Australia's 30 per cent rate is more competitive than the US, especially once dividend imputation credits for shareholders are taken into account.
In 2001, Australia had the ninth lowest corporate tax rate in the developed world. The OECD average has since fallen to 25 per cent and Australia has slipped to 28th, as economies including the United Kingdom, Ireland and New Zealand have cut corporate rates.
Pfizer expects the combined maker of Botox and Viagra to have an adjusted tax rate of about 17 per cent in Ireland, compared with the 25 per cent it pays in the US after allowing for deductions.
"The threat of succumbing to US tax rates has meant that Pfizer has been desperate for a deal outside the US," said Warwick Business School professor John Colley.
The US not only has a high maximum rate, but unlike other economies, it taxes corporate earnings overseas when they are repatriated. This has led to the perverse situation of companies such as Apple stashing large amounts of funds overseas and borrowing money at home to pay dividends.
As the mining boom winds down, Australia will need to retain and attract new sources of foreign capital into other sectors of the economy.
A competitive corporate tax system will be an important drawcard.
Key points
Drug giant Pfizer is to take the domicile of its takeover target, Allergen, in Ireland.
High tax rates in the US have prompted the company's decision.