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Tuesday, April 29, 2014

Pfizer's Acquisition of AstraZeneca May Spur Rush of Tax-Avoidance Inversions (and Congressional Action)

Bloomberg:  U.S. Treasury Seen Loser in Tax-Avoiding Pfizer Deal, by Jesse Drucker & Zachary R. Mider:

Pfizer 2If Pfizer is successful in its $98.7 billion takeover of London-based AstraZeneca, there is one big potential loser: the U.S. Treasury.

Under the proposed deal’s structure, the combined company would be owned by a new U.K. parent. That doesn’t mean any of New York-based Pfizer’s executives would need to move abroad: Chief Executive Officer Ian Read has said the drugmaker would be run from the U.S. It does mean, however, that Pfizer is joining a wave of U.S. companies using mergers as ways to slash income tax bills by shifting their head office overseas -- often on paper only.

“This is basically an opportunity to go outside the U.S. and still sell in the U.S. and strip the tax base,” said H. David Rosenbloom, an attorney at Caplin & Drysdale in Washington and director of the international tax program at New York University’s school of law. “If we ever had a legislature in the United States, we could do something about this, but I don’t expect to live that long.”

U.S. law seeks to stop companies from avoiding income taxes by simply ditching their home residence. Those rules only prevent companies from getting the tax benefit of an overseas merger if their existing shareholders still own 80 percent or more of the company’s stock after the deal.

In Pfizer’s case, shareholders likely would own less than that proportion of the new combined company.

By switching its parent company from the U.S. to the U.K., Pfizer could take advantage of a number of tax benefits. The U.K. corporate tax rate is 21 percent -- next year dropping to 20 percent -- compared with 35 percent in the U.S. In addition, the U.K. only taxes profits that companies say are earned within the country.

So earnings attributed to subsidiaries in tax havens aren’t then taxed when they are brought home. And the newest benefit: the U.K. is phasing in a 10 percent tax rate on profits attributed to U.K. patents, a big source of income for any drugmaker. ...

Last year, Pfizer reported an effective tax rate of 27 percent.

The U.S. Congress tried to impose a moratorium on such corporate moves overseas -- called inversions -- in 2002. Two years later, it passed legislation designed to limit that practice.

Nevertheless, since 2012, at least 15 large companies have either moved or announced plans to move offshore, including Chiquita Brands International Inc., the Charlotte, North Carolina-based banana importer, and New York-based Omnicom Group Inc., the largest U.S. advertising firm.

(Hat Tip: Bruce Bartlett)

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Comments

"“This is basically an opportunity to go outside the U.S. and still sell in the U.S. and strip the tax base,” said H. David Rosenbloom, an attorney at Caplin & Drysdale in Washington and director of the international tax program at New York University’s school of law. “If we ever had a legislature in the United States, we could do something about this, but I don’t expect to live that long.”"

That is the most awesome political observation I've read in a long time.

Posted by: Unemployed Northeastern | Apr 29, 2014 12:38:15 PM