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Tax and the Pfizer bid for AstraZeneca

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Tax is always a factor in a major deal, but the recent bid by Pfizer for AstraZeneca has been unusual in the prominence given to tax issues. The main points are US ones – Pfizer has a significant (around $63bn) offshore cash pile, and has made a balance sheet provision of $19bn for potential US tax on repatriation. Spending the money on an overseas acquisition, rather than paying it back to the US, therefore brings the chance of very major tax savings.

Pfizer has said that it will invert its domicile to the UK, by placing a UK holding company on top of the structure. The US rules currently restrict inversions to those where foreign shareholders will own at least 20% of the combined group – a threshold which will be reached by Pfizer/AZ. However, a White House proposal to increase this to 50% by the end of the year could make the deal much harder to achieve – hence perhaps the incentive to get the deal done now.

The UK patent box has also been mentioned as a factor, and Pfizer has committed to investing in R&D and manufacturing jobs in the UK, although only for an initial five year period and subject to adjustment ‘should circumstances significantly change’. It may be that this is an early sign of the BEPS project starting to have an impact. Will US MNCs start to move to government approved European structures, rather than continuing to rely on more aggressive accumulation of income in tax havens via the infamous ‘Double Irish’ and similar schemes?

Overall, the US tax system appears perverse in encouraging US MNCs to invert or invest overseas rather than in the US – but it will not be easy for politicians to agree on how, if at all, it should be reformed.