Tag Archives: U.S. corporate tax

U.S. corporate mergers end “US personhood” and #IRS discount – increase value

Updated April 28, 2014 – with comment from the Isaac Brock Society:

 

Not quite on topic but I thought it would be interesting to note nonetheless.

Pfizer announced this morning that they had made an indicative proposal to AstraZeneca in January to combine the two businesses. The proposal was rejected by AstraZeneca but Pfizer is seeking to reengage. As part of the proposal, Pfizer was going to become a UK domiciled company.

The US has amongst the highest corporate tax rates in the world and taxes the difference between the local tax rate and the US tax rate if profits are repatriated from overseas. Pfizer’s annual report says they hold 10-30% of their cash and cash equivalents and short-term investments in US tax jurisdictions. This means that 70-90% of the $32 billion in cash and cash equivalents and short-term investments as at 31 December 2013 are held outside the US. If the business combination with AstraZenaca is successful (or a different combination with another overseas business), that’s $21-27 billion that will never be repatriated to the US.

The process of redomiciling overseas is referred to as a corporate inversion and used to be very rare. However, increasingly, US companies are doing so to get access to profits that are otherwise “trapped” overseas. Predictably, the US government enacted legislation to “punish” the executives of companies that pursued a corporate inversion. Their stock options would be subject to an additional tax upon vesting. Equally predictably, this legislation was buried in a jobs creation act.

It seems, however, that the additional tax on vested options hasn’t proven to be a disincentive. In fact, it might be an incentive. In the case of Actavis, the board allowed certain executives’ options to vest early and then reloaded them with new options. As the Bloomberg article points out, the executives of Actavis got the best of both worlds (http://www.bloomberg.com/news/2013-12-19/actavis-managers-reap-115-million-after-buying-warner-chilcott.html).

While corporate and individual taxation are not entwined, perhaps the news that one of the US’ largest pharma companies is seeking to redomicile will prompt much needed action on both fronts.

 

 

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