The Financial Times has an editorial (29 April) on the influence of tax on the approach by Pfizer for Astra Zenaca and poses some questions but does not go far enough, it doesn’t address the possible consequences on tax policy and of the OECD BEPS project on corporate ownership.
Pfizer has a cash mountain held offshore US because it has earned significant non US profits which have been taxed at very low rates in part due to its use of the double Irish structure (Wiki lists Pfizer as one of the top beneficiaries). It can’t remit those profits to the US because they would be taxable with low credits for foreign tax and it hasn’t provided for this tax in its accounts so a remittance would hurt earnings. So one way to solve this problem is to spend the cash on a foreign acquisition – whether this consequence of US tax policy creates a non-level playing field in corporate acquisitions, is an interesting question?
The new development is the idea of redomiciling the merged group to the UK. Does this have anything to do with BEPS? Possibly. And what are the consequences for tax policy?
The redomicile to the UK would remove the benefit of the Double Irish Structure (unless the UK Revenue doesn’t tax it under the UK CFC rules) but it allows the group to repatriate those trapped funds going forward to the UK holding company (as the UK doesn’t tax dividends received) and benefit from a significantly lower corporate tax rate – an arbitrage of 15% between the US and the UK is significant.
Is Pfizer considering this because it has concerns about the longevity of the Irish structure under BEPS and the longer term impact on its earnings? More interestingly how will the US and UK governments respond? What is fair tax competition between countries in the world going forward? And finally, can the US afford to avoid reforming its corporate tax code if transactions like this go ahead?