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New York - If Pfizer succeeds in its $98.7 billion takeover of London-based AstraZeneca, there is one big potential loser: the U.S. Treasury.
Under the proposed deal's structure, the combined company would be owned by a new British parent. That doesn't mean any of New York-based Pfizer's executives would need to move abroad: Chief Executive Officer Ian Read has said the drugmaker would be run from the U.S. It does mean, however, that Pfizer is joining a wave of U.S. companies using mergers as ways to slash income tax bills by shifting their head office overseas - often on paper only.
"This is basically an opportunity to go outside the U.S. and still sell in the U.S. and strip the tax base," said David Rosenbloom, an attorney at Caplin & Drysdale in Washington and director of the international tax program at New York University's school of law. "If we ever had a legislature in the United States, we could do something about this, but I don't expect to live that long."
U.S. law seeks to stop companies from avoiding income taxes by simply ditching their home residence. Those rules only prevent companies from getting the tax benefit of an overseas merger if their existing shareholders still own 80 percent or more of the company's stock after the deal.
In Pfizer's case, shareholders likely would own less than that proportion of the new combined company.
By switching its parent company from the U.S. to Britain, Pfizer could take advantage of a number of tax benefits. The British corporate tax rate is 21 percent - next year dropping to 20 percent - compared with 35 percent in the U.S. In addition, Britain taxes only profits that companies say are earned within the country.
So earnings attributed to subsidiaries in tax havens aren't then taxed when they are brought home. And the newest benefit: Britain is phasing in a 10 percent tax rate on profits attributed to British patents, a big source of income for any drugmaker.
"The way we're structuring this is, it's fully compliant with the appropriate laws," Pfizer CEO Read told analysts on a call Monday. "It's in my future responsibility to maximum return to shareholders, and I don't actually see that is a conflict of with the interest of the U.S. government."
Last year, Pfizer reported an effective tax rate of 27 percent.
"Actions like this demonstrate the urgency for tax reform," said Lindsey Held, a spokeswoman for Senate Finance Committee Chairman Ron Wyden, D-Ore.