The lengthening list of tax inversion deals involving US pharmaceutical companies could be cut short if the US administration has its way.
The rhetoric coming out of the White House and Treasury Department has become increasingly combative in the last couple of weeks, as more and more US companies announce plans to acquire companies overseas in order to shift their domiciles and sidestep high US corporation tax rates.
Congress is at a stalemate on a Budget measure, tabled two years ago, that includes an anti-inversion provision. So President Obama wants the Treasury to deploy any measures it can in the near term – short of new legislation – to close the loophole and do away with the financial incentive behind the deals.
Obama recently accused companies domiciling elsewhere to get out of paying taxes, despite keeping most of their business in the US, of “economic unpatriotism” and “renouncing their citizenship.”
Last week, Treasury Secretary Jacob Lew said inversions “had accelerated in recent months” and stressed that while tax reforms were urgently needed to make the US more competitive with other countries around the world “we must confront this problem now, before our tax base is so eroded as to damage the prospects of comprehensive reform”.
The ultimate aim is to enact legislation that would prevent companies from changing their tax domicile unless overseas shareholders hold more than 50 per cent ownership of the company. At the moment, the threshold is 20 per cent, said Lew, who wants the measure to be deployed retroactively to early May 2014.
More immediately however, the Treasury is looking at measures which would “limit the ability of companies to engage in inversions, as well as approaches that could meaningfully reduce the tax benefits after inversions take place”, according to a just-released statement, which for the first time suggests swifter action may be possible.
At the moment the nature of those measures is vague and there is considerable debate on whether the objectives are achievable legally.
Nevertheless, the growing political pressure comes at an uncomfortable time for AbbVie, which is racing to finalise its £32bn takeover agreement for Shire, the largest tax inversion deal involving a pharma company to date. The two firms have repeatedly indicated the deal will cut AbbVie’s corporation tax rate to 13 per cent by 2016, from a level of around 22 per cent at the moment.
Inversion was also a driver for Pfizer’s £69bn attempt on AstraZeneca (AZ) which was abandoned in May after the deadline for a formal offer expired under UK takeover rules – but it could still be revived in November.
AZ chief executive Pascal Soriot insisted at the time that political unrest over inversion deals introduced a major risk for the takeover, but Pfizer’s CEO Ian Read appears unrepentant on the issue, telling the Financial Times a few days ago that the company would continue to pursue inversion deals while it is still legal to do so.
Tax reductions are also being proffered as an incentive for shareholders in Valeant’s hostile bid for Allergan and Mylan’s $5.3bn agreement to buy Abbott’s non-US generics assets, but these latest transactions are only the latest in a series of inversion deals in recent years that on average have reduced company tax rates from 25-30 per cent to 15-20 per cent.
Companies such as Actavis, Alkermes, Medtronic, Endo, Perrigo, Jazz and Forest Labs have all cited tax reductions as a feature of acquisitions in recent years, and Congress has said it is aware of more than 50 such deals across all industrial sectors.