US tax inversion crackdown hits pharma

Share prices in several pharma companies have been adversely affected by the US Treasury Department’s new rules on so-called tax inversions, which aim to curb the practice of US companies buying firms in other countries to benefit from lower tax rates.

Following the US Treasury Department announcement on Monday, the share values of AstraZeneca (AZ), Pfizer, AbbVie, Shire, Medtronic, Covidien and Abbott Laboratories have fallen. All of these companies have been involved in talks about deals which would allow the US companies to benefit from tax inversion.

The UK and Ireland have proved popular targets for US companies as their corporation tax is 21 per cent, reducing to 20 per cent in 2015, as opposed to a rate of 35 per cent in the US.

Earlier this year Pfizer hit the headlines with its attempted hostile takeover of AZ, putting the tax inversion issue firmly in the Obama administration spotlight. Though it was rebuffed and made to hold off until 26 November under UK regulations, some analysts think Pfizer may still look to reopen negotiations, despite this week’s amendments in the US.

The US Treasury Department made changes to five sections of the tax code in a move designed to make companies ‘think twice’ about such deals, according to Treasury Secretary Jacob Lew. Three of these set out to block companies from getting access to their offshore funds without paying US tax on them and apply to deals closed from 22 September onwards.

The other changes make it more difficult to spin off subsidiaries overseas or to avoid current ownership standards in inverting.

However, Citigroup analyst Andrew Baum noted that the new measures ‘do little to negatively impact the economic benefit’ of a future deal between Pfizer and AZ, saying that Pfizer could still avoid using the loans the rules are set to prevent. And, with the plunge in AZ shares by 4.5 per cent on Tuesday this week, the company could be a more attractive takeover target.

Analysts think that deals agreed but not completed before the changes, such as AbbVie’s takeover of Shire and Medtronic’s purchase of Covidien, are likely to go ahead, although perhaps under revised terms.

Additionally, there have been questions raised about the legality of the Treasury Department moves, with some analysts not discounting the idea of legal challenges in future.

The Treasury also stopped short of limiting the ability of inverted companies to push US profits abroad tax free, although it said it would continue to investigate further measures to discourage inversion practices.


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