Paul L. Caron

Thursday, June 27, 2019

AbbVie Moves Allergan Profits To U.S. In Partial GOP Tax Law Win

Bloomberg News, AbbVie Moves Allergan Profits to U.S. in Partial GOP Tax Law Win:

AAAllergan, the drugmaker that emigrated to Ireland to avoid U.S. taxes in 2015, is now coming home — at least partially.

Allergan’s income will generate some U.S. taxes because of a deal announced Tuesday for AbbVie Inc. to acquire the Dublin-based company, even though it will remain in Ireland.

Even the partial homecoming represents a win for U.S. lawmakers and regulators who have spent years trying to stop companies from moving their headquarters abroad to largely avoid taxes.

The $63 billion AbbVie acquisition is a big shift from 2015, when Allergan made moves to escape the U.S. tax net. The company underwent a complicated transaction known as a corporate inversion, in which it was acquired by Actavis, a smaller Irish drugmaker. Allergan continued to be managed from New Jersey but was able to use its Irish address for tax purposes, where the corporate rate is 12.5%.

“Unlike an inversion where U.S. income is transformed into foreign income, in the instant case, the polar opposite may well occur -- since, here, foreign income might be transformed into U.S. income,” Robert Willens, an independent tax consultant, said Wednesday in a note to clients.

A few years ago, this deal would likely have gone very differently — Allergan would be the one buying AbbVie. In fact, Allergan tried this type of inversion with Pfizer in 2016, but U.S. Treasury Department quickly wrote regulations that effectively killed the transaction before the companies could close the deal. In 2014, AbbVie also tried to invert, but Treasury blocked the proposal.

The merger makes Allergan a special type of entity, known as a controlled foreign corporation, AbbVie spokeswoman Adelle Infante said. And under the 2017 Republican tax law that means Allergan will likely pay U.S. tax on some of its income, but not at the full 21% corporate rate.

The 2017 tax overhaul cut the rate from 35% to 21% and killed off nearly all remaining reasons for companies to invert. But Allergan will likely have to pay a new tax in the law on what is known as global intangible low-taxed income, or Gilti, said Albert W. Liguori, managing director at consulting firm Alvarez & Marsal Taxand.

Wall Street Journal editorial, Tax Reform’s Remedy for Outsourcing:

The AbbVie-Allergan tie is a bet on innovation, not tax arbitrage.

Like other recent pharmaceutical tie-ups, AbbVie ’s proposed merger with Dublin-based Allergan announced Tuesday is driven by the need to innovate amid increasing competition. This is a welcome change from the Obama years when drug makers were trying to merge with foreign firms to mitigate America’s uncompetitive corporate tax rate. ...

Big Pharma is a perennial political target, but market consolidation can be healthy if it’s driven by competition. That wasn’t the case five years ago when AbbVie sought to reduce its tax bill by merging with Shire, which was domiciled in Ireland where the corporate rate is 12.5% and intellectual property is taxed at 6.25%. Pfizer sought to hook up with Allergan for the same reason, though the Obama Treasury scuttled both tax “inversions.”

The GOP tax reform has reduced the perverse business incentive to relocate abroad by lowering the corporate rate to 21% from 35% and the rate on foreign income generated by U.S. intellectual property to 13.125%. As a result, U.S. drug makers are more globally competitive and have more capital to spend on curing cancer and erasing age wrinkles.

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