Tax inversion has been a trend in the biotech and pharmaceutical industry, involvinga U.S.-based company acquiring a smaller foreign company in order to reduce paid taxes. Not surprisingly, legislators aren’t happy that so many tax dollars are moving offshore.
The biggest story of late: Pfizer Inc.’s (PFE) failed bid for London-based AstraZeneca (AZN) for $98.7 billion. Other examples include Endo Health Solutions’ (ENDP) purchase of Canadian Paladin Labs, and Medtronic’s $42.9 billion bid for Covidien (COV), headquartered in Ireland. Generally speaking, the U.S. corporate tax rate is between 35% and 40%. Ireland’s corporate rate is 12.5%. Founder and managing director of Global TaxFin Advisory Group, Jake Feldman, points out in a recent Forbes article that a lower tax rate can be as financially beneficial to a company as a billion dollar product.
But getting airtime this week is a letter from Treasury Secretary Jacob J. Lew to Congressman Dave Camp, Chairman of the House Committee on Ways and Means, published by the Wall Street Journal: “The best way to address this situation is through business tax reform that lowers the corporate tax rate, broadens the tax base, closes loopholes, and simplifies the tax system. But, even as we work to do that, we should prevent companies from effectively renouncing their citizenship to get out of paying taxes.”
Barring an unlikely systematic and sweeping change to the U.S. corporate tax code, the White House Fiscal Year 2015 proposes that companies that change their corporate tax domicile will subsequently change control of the company itself. Furthermore, legislators hope to make the proposal retroactive to May 2014.
Opposing legislators, including Sen. Orrin Hatch (R-Utah), express concern that this would only increase the United States’ competitive disadvantages. Rhetoric has not entirely divided along party lines, either, with Finance Committee Chairman Ron Wyden (D-Ore.) stating “this loophole must be plugged,” but indicating he hopes for a comprehensive rewrite of the tax law.
A note from Goldman Sachs analyzes the tax structure of inversion deals and points out that there are limitations. The new entity from the consolidation needs to have a minimum 20% foreign ownership in order to quality for the tax inversion. As a recent Forbes article points out, “That means [the] target has to have a market cap at least 25 percent that of the U.S. bidder—and that is only if the deal is fully financed by equity.”
The upshot is that there are a limited number of candidates for tax inversions. In addition, with Congress and the White House looking to close loopholes and/or pushing for extensive tax reform, the days in which a tax inversion strategy is viable may be limited.
For now, however, and similar to legislators’ grandstanding regarding Gilead’s (GILD) Sovaldi pricetag, there’s little that can be done to stop current inversion deals.
