Pfizer Inc. was recently offered $100 billion from the British rival AstraZeneca, which would cause giant waves in the pharmaceutical world. A plethora of companies this past year have decamped from the U.S. and have moved to Europe for more favorable taxes. These transactions, known as “inversions,” require the company to transfer a minimum of 20 percent of its shares to foreign ownership.
Pfizer’s inversion would allow the pharmaceutical company to deploy cash overseas without incurring U.S. tax bills. If the company makes the switch, it will keep its operational headquarters in New York City. “That would still allow me to access the offshore funds and do it in a tax-efficient way,” Pfizer Chief Financial Officer Frank D’Amelio said in a public statement.
Pfizer paid nearly 6.1 percent more in effective tax rates last year compared to their counterpart AstraZeneca. Despite seeming like a minuscule difference, each percentage point in tax reduction could add roughly $200 million to Pfizer’s annual net income. In addition, the U.K. offers tax credits for research and development, which would be highly beneficial for a pharmaceutical firm looking to create cutting-edge drugs.
Pfizer has consistently paid higher tax rates than many of its local competitors,” however, it had strategically left a substantial amount of its profit overseas to avoid paying taxes that would subtract a lot of profit. Pfizer claimed that between 70 percent and 90 percent of the nearly $50 billion in cash and equivalents the company has had on hand are outside the U.S.
Pfizer has been frustrated by the U.S. tax system for a while. Ian Read, chief executive, stated, “There should be a tax rate that allows us to compete in the global marketplace.” Read complained that it is extremely difficult for a U.S.-based company to be competitive in oversea venues, since U.S taxes are higher. Read has shown support for tax-code changes that would even out the playing field for U.S. companies.
D’Amelio told analysts and investors Monday that creating a U.K.-based holding company out of the acquisition of AstraZeneca would give the company a lower tax rate going forward.
The decision to go abroad could stir up anger amongst the Republican and Democratic lawmakers in Washington, who have critiqued corporate efforts to sidestep U.S. taxes. However, Read stressed in the investor call that the main goal of the deal is to increase sales, which would eliminate redundant spending. He added that on by saying he expects any combination to be fully compliant with the appropriate laws. Pfizer, in return, will keep its corporate headquarters in New York City and its listing will be placed on the New York Stock Exchange.
The White House’s proposed 2015 budget seeks to eliminate inversions by requiring foreign partners to own more than half of any post-merger company. As a result, Pfizer has to make an executive decision swiftly regarding its life-changing move. The decision to go abroad could makea huge impact on local jobs and the U.S. economy. Considering the magnitude of Pfizer, the buyout would cause waves in the pharmaceutical world.