Pfizer approach to Actavis could be to circumvent US tax rules
PFIZER has approached Actavis about a deal that could allow the US drug maker to move its address overseas and reduce taxes, in a sign the Obama administration’s efforts to curtail inversions might fall short.
Pfizer made its approach before the US Treasury announced new rules on Monday to make such deals — called tax inversions — more difficult, people with knowledge of the matter said. Those changes will not deter Pfizer, even if they are a complication, one of the people said, asking not to be identified discussing private information.
Another high-profile inversion deal, Burger King Worldwide’s purchase of Tim Hortons, would proceed, the Canadian company said after the rule changes were revealed.
While Treasury Secretary Jacob J Lew could take further steps, he steered clear of ending a key benefit of inversions, which allow companies to lower their US earnings by shifting profits overseas using a technique known as earnings stripping.
“The ability to shelter future foreign earnings from US tax seems to be a principal objective and, as far as I can see, that benefit remains,” Robert Willens, a corporate tax consultant in New York, said yesterday.
While Pfizer is not just looking to cut taxes — it is also seeking to bolster its product pipeline — CEO Ian Read has made no secret of his objections to US tax policy.
“There’s no substantial advantage to being a US company, to doing business in the US,” he said on a July conference call. “We are at a tremendous competitive disadvantage.” Mr Read also said he was tired of criticism directed at companies and CEOs for doing what he says may be the best strategy to help shareholders.
Pfizer made its approach before the US treasury announced new rules on Monday to make such deals
Pfizer and Actavis were not in formal talks and Pfizer had not made an offer, the people said. The approach comes after Pfizer in May abandoned a $114bn bid for AstraZeneca.
Actavis, which is run from Parsippany, New Jersey, obtained an Irish tax domicile by acquiring Warner Chilcott last year. After its shares rose 2.2% this week, the company has a market value of almost $64bn.
Although AstraZeneca rebuffed Pfizer’s approach, the US drug giant was still considering pursuing that deal as well as other options, the people said. Representatives for Pfizer and Actavis declined to comment.
Presented under pressure from Democrats, and constrained by the strictures of the tax code, the Treasury’s plan sticks to areas where the administration has clear legal authority without needing approval from Congress. It mostly targets deals where the value of an inversion is derived from unlocking US companies’ stockpiled foreign earnings.
That stockpile, now exceeding $2-trillion, is a result of the fact that companies do not have to pay taxes on profits as long as they are kept outside of US borders.
Pfizer has indicated it has as much as $30bn in offshore cash and investments.
Still, the government did not address earnings stripping — a manoeuvre that companies use to load their US operations with deductions for debt and other items, effectively pushing the profits to the foreign country with a lower rate. “They’re ignoring the most important post-inversion planning, and that’s earnings stripping,” said Bret Wells, a tax law professor at the University of Houston.
Although the government may make more changes, “the tepid response that this represents could well embolden companies to believe that the Treasury is not going to deal with earnings stripping through regulations”.
Pfizer’s effort to acquire Astra Zeneca was among a number of high-profile deals that have caught US legislators’ attention this year, prompting the Treasury’s response, including Burger King’s deal to buy Tim Hortons and move its address to Canada.