The spotlight is on Pfizer (NYSE: PFE.US) right now as its record-breaking offer of $106.43bn for UK-based pharmaceutical giant AstraZeneca (LSE: AZN) (NYSE: AZN.US) is causing a ruckus in government corridors on both sides of the Atlantic.
In the US, Senators are attempting to draft legislation that will put a halt to large corporations deserting the US to save tax. Commentators are branding Pfizer ‘Un-American’ as it makes no secret that the buyout is primarily a tax-planning scheme, and if the deal is successful it will relocate its tax residence to the UK. It has AstraZeneca firmly in its sights as a home for the $69 billion of earnings it has stashed in offshore tax havens and which it promised never to repatriate to the US to avoid a 39% US corporation tax bill.
On this side of the Atlantic, politicians are fearful that if Pfizer is successful it will repeat its behavior of 2011 when it laid off thousands of employees and closed down R&D factory in Sandwich, Kent to save costs.
According to Sweden’s finance minister, Anders Borg, Pfizer also failed to keep promises made to them on research jobs when it bought Swedish drug-maker Pharmacia in 2002.
MPs are demanding the government applies a ‘public interest stress test’ for this merger and, having examined the small print, the suits in Whitehall have discovered that the legislation does not include life science companies. The government can only intervene on mergers or takeovers where there is a national security issue, media plurality, competition concerns or national financial stability. Vince Cable told MPs “One of our options as the government would be to consider using our public interest test powers. But we are operating within serious European legal constraints.”
UK ministers have so far got assurances from Pfizer that include a commitment from the US firm to complete AstraZeneca’s planned scientific campus in Cambridge, to base 20% of the new company’s research and development workforce in the UK and to manufacture more products here, but it is not clear how these promises will be sanctioned.
The British Tax Bounty
The UK government has been actively pursuing a strategy to win multinational tax dollars. By 2015 the corporation tax rate will be reduced to 22%, with Chancellor George Osborne boasting that this would “give Britain the lowest tax rate of the Group of Seven leading industrial countries”. It has also introduced a new regime that from 2017 will mean income from patents will be taxed at just 10%. With the whopping 130% tax relief already available on research and development expenditure, there is a strong value proposition for pharmaceutical and technology companies to base themselves in the UK.
The government’s tax policy has certainly seen some successes, as not only are US companies relocating to the UK, but WPP moved back to the UK from Ireland after just four years.
Companies are increasingly shopping the world for low tax regimes, and competition among nations will hot up as governments choose to use tax incentives as tools to stimulate their economies. As global institutions take a transient approach to their resident status, we can expect shifting dynamics for years to come.