Big pharma merger will re-domicile US firm into UK

Monday, 21 July 2014
In one of the clearest examples of the US corporate trend for 'inversion' tax planning, the American pharmaceuticals maker AbbVie is to take over its Ireland-based rival Shire and domicile the resulting firm in the UK.

Inversion is a technique in which a merger or acquisition results in the senior partner in the deal moving its tax residence to another jurisdiction, usually for tax reasons. It has recently become topical in the US corporate scene because of the relatively high levels of corporation tax there, compared to other jurisdictions – including the UK – which have been cutting their corporation tax rates.

Moreover, profits earned by the overseas operations of US multinationals only become liable to corporation tax when they are repatriated to the US. So many of these companies have kept their profits abroad and are now holding large overseas reserves, estimated at USD2,000 billion in total. This gives them a strong financial motive to seek a new tax domicile.

AbbVie's plan is to set up a new corporate vehicle in the British Crown Dependency of Jersey, and use it to acquire the much smaller Shire, as well as to absorb AbbVie's existing operations. The new company will reincorporate in the UK though the actual operations will not be moved. It will pay an effective US corporation tax rate of only 13 per cent compared to 22 per cent now. Shire itself is incorporated in Jersey and tax-resident in Ireland, though its board of directors is split between England and Massachusetts.

There have been about 50 US tax inversions in the past ten years. Another one took place last week, when Mylan agreed to buy Abbott's generic medicines business and reincorporate in the Netherlands.

But the USD53 billion cost of the Shire acquisition makes it the biggest inversion deal yet. AbbVie's chief executive Richard Gonzalez said the trend for tax inversions was due to the US' high tax on repatriated profits, which puts US-based multinationals at a disadvantage in global markets. 'Companies like ours need access to our global cash flows to be able to make investments all around the world, but to specifically be able to make investments in the United States', he said.

But Democrat party politicians are now pushing for legislation to counter such practices. One idea is to restrict a change of tax residence to mergers where the overseas partner is at least the same size as the US acquirer.

Sources

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