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 Pfizer said it wants to buy AstraZeneca and merge the two companies
into a UK holding company with a UK tax domicile, while maintaining
its operational headquarters in New York. It would likely be the
largest deal ever done that included such a so-called tax
"inversion."
If a deal goes through — which is far from certain given AstraZeneca
has so far rejected Pfizer's overtures — it would likely mean a loss
of corporate tax revenue for the United States, and a lower
effective tax rate for the combined entity than the two companies
pay now.
For 2013, Pfizer disclosed an effective rate of 27.5 percent and
global cash income tax paid of $2.87 billion, including income taxes
paid to the U.S. government and other state and foreign tax
authorities, based on company filings.
The Pfizer proposal triggered concern in Washington. "This further
demonstrates the urgency for tax reform," said a spokeswoman for
Democratic Senator Ron Wyden, chairman of the tax-writing U.S.
Senate Finance Committee.
"Now is the time to undertake comprehensive reform to ensure our
country stays competitive on a global stage and continues to be the
best place for corporate investment," the spokeswoman said.
Governments worldwide are increasingly wary of corporate tax
avoidance. The Obama administration earlier this year included a
proposal in its 2015 budget to clamp down on deals like the one
Pfizer is pursuing. The administration's proposal is unlikely to go
anywhere though with Congress deadlocked on tax issues.
The U.S. Internal Revenue Service on Friday issued a separate notice
limiting shareholders' tax-free treatment in inversion transactions.
TAX-DRIVEN DEALS RAMP UP
Since the 2008 global financial crisis, about two dozen U.S.
companies have shifted their legal tax residences to lower-tax
countries via corporate deals, versus about the same number over the
previous 25 years, a Reuters review of transactions showed.
Ireland, the Netherlands, Switzerland, Canada and Britain lately
have been the most common destinations of U.S. companies seeking new
tax domiciles, replacing preferred havens of years past such as
Bermuda and the Cayman Islands.
Buying AstraZeneca would allow Pfizer to escape the comparatively
high 35-percent U.S. corporate income tax rate.
The United States has one of the highest such tax rates in the
world, though most multinational companies pay less than that due to
plentiful loopholes.
Pfizer spokeswoman Joan Campion said the UK holding company
structure being contemplated "provides for a more efficient tax
structure that doesn't subject AstraZeneca's non-U.S. profits to
U.S. tax." Campion declined further comment.
Inversions allow U.S. corporations to escape that high rate by
moving to a lower-tax country, via an acquisition, a merger or the
creation of a new holding company. They can also reduce overall U.S.
profits in a process known as "earnings stripping" that involves
loading up the legacy U.S. business with tax-deductible debt, said
academics and private tax watchdog groups.
The AstraZeneca transaction would also give Pfizer a way to spend
some of an estimated $69 billion it is holding abroad under a law
that lets U.S. companies shelter overseas earnings from U.S. taxes
by keeping them out of the United States.
OMNICOM-PUBLICIS DEAL
Another large inversion deal is New York advertising firm Omnicom
Group Inc's <OMC.N> proposed $35-billion merger with Paris rival
Publicis Groupe SA <PUBP.PA). This transaction is encountering
approval delays among European tax authorities.
Omnicom and Publicis announced in mid-2013 they planned to merge
into a new corporate holding company to be based in the Netherlands,
with operating units staying in New York and Paris.
The merger was described then as tax-free to shareholders of both
companies, with each side getting about 50 percent of the shares in
the new Dutch holding company. The deal was then expected to close
in late 2013 or early 2014.
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Last week, Omnicom said Dutch and UK tax authorities had not yet
approved the deal, which Omnicom had previously said would save $80
million a year in taxes. A plan to make the company tax resident in
the UK while being domiciled in the Netherlands had become a
particular stumbling block.
Omnicom-Publicis is more like a merger of equals than it is an
inversion, but "the practical impact of this transaction is that the
company is achieving a corporate inversion," said Bret Wells, a
professor at the University of Houston Law Center who has studied
corporate inversions for years.
Though the Obama budget proposal is unlikely to become law anytime
soon, it does indicate that the U.S. government is trying to grapple
with the question of inversions.
"It's been a decade since the first inversion legislation was
enacted and Obama is now trying to tighten the rules," said Steven
Rosenthal, a tax expert and senior fellow at the Urban Institute, a
policy think tank in Washington, D.C.
"There's a lot of concern about losing U.S. companies to these
reflagging operations," he said.
IRS TAKES STEP
The IRS's move last week "further evidences the government's narrow
reading of the inversion rules and dovetails with the Obama
administration's 2015 budget proposal to narrow the scope of
permitted inversions," said international law firm Cadwalader,
Wickersham & Taft LLP in an emailed update to clients on tax-related
merger and acquisition developments.
"More companies are currently considering inversions by merger,
including mergers involving two or more foreign jurisdictions," said
Linda Swartz, chair of Cadwalader's tax group. "Companies have
become more comfortable with the prospect of inverting as the number
of announced deals has steadily increased this year."
The Organization for Economic Co-operation and Development, a
Paris-based club of major industrial economies, is studying tax base
erosion and the related issue of profit shifting by multinational
corporations among units in different countries.
The United States was among members of the G20 nations that endorsed
the OECD project. "Profits should be taxed where economic activities
deriving the profits are performed and where value is created," said
a declaration of the G20 leaders in September after a summit meeting
in St. Petersburg, Russia.
The IRS has addressed inversions, which are generally thought to
have first emerged in 1982, by trying to define what is and is not a
foreign business, and by trying to curb opportunities for earnings
stripping, but with little success.
A flurry of deals from 1997 through 2002 saw several major U.S.
companies reflag in Bermuda and the Cayman Islands. Congress cracked
down with a stricter law in 2004 and the flow of deals dried up for
a few years.
The latest wave of deals got under way in 2008 after the financial
crisis abated. The wave has continued amid inconclusive IRS efforts
to define how much presence a corporation must have in the United
States and abroad to be treated as a foreign company for U.S. tax
purposes.
(Additional reporting by Tom Bergin and Ben Hirschler in London;
Nicola Leske, Olivia Oran, Nadia Damouni, Leila Abboud and Ransdell
Pierson in New York; editing by Martin Howell)
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