The outcome of the hostile Pfizer takeover bid for AstraZeneca will ultimately be decided by shareholders. Although the bid is not being driven by tax considerations, these do play an important part in the structure and timing of the deal.
On the US side, Pfizer wishes to move its tax base from the USA to the UK. With a headline corporate tax rate in the USA of 35 per cent (higher when state taxes are included), compared with 20 per cent in the UK from next April, it makes sense.
At a stroke, Pfizer can use profits accumulated outside the USA (and not yet taxed in the USA) to acquire AstraZeneca and by reorganising under a new UK holding company, can permanently avoid high US taxes on such profits. To do so, the new group will need to satisfy US rules regarding such so-called “inversions”.
One way to achieve this is if the enlarged group has at least 25 per cent of its business activities in the UK, although this has to be met with respect to employees, assets and income.
Pfizer is only pledging that 20 per cent of its R&D workforce will be based in the UK and globally, and the new group would have a combined workforce of 121,000, of whom only 9,200 (8 per cent) would be in the UK. So it’s clear that the 25 per cent test would not be met, based on employee numbers alone.
Therefore Pfizer will need to rely on the other exemption from the anti-inversion rules which stipulates that there is at least a 20 per cent change of ownership post-inversion, and so must be counting on the former AstraZeneca shareholders having at least that much of the combined venture.
If successful, the inversion will result in the groups effective tax rate falling permanently. Clearly, this will result in a potentially substantial loss of tax revenue to the USA, which is no doubt why President Obama has indicated he is planning to increase the required change of shareholder base from 20 per cent to 50 per cent. This may also account for some of the apparent urgency attaching to the takeover.
In the UK, the government has pursued a “race to the bottom”, with the express intention of having the most competitive tax regime in the G20.
The 20 per cent rate which is introduced next year, combined with other recent changes such as the dividend exemption and reformed controlled foreign companies rules, are intended to achieve just that.
These, coupled with the recently introduced Patent Box (a 10 per cent tax regime for profits from UK and other European patents) and R&D tax credits both of which are of particular benefit to pharmaceutical companies and the absence of withholding tax on UK dividends, makes the UK look like a tax haven when compared with the high-taxing USA.
Like it or not, UK governments over the last decade have constructed a tax system which, although it may not cause the acquisition of British crown jewels by overseas investors, certainly encourages it.
George Bull is national chair of the professional practices group at Baker Tilly.