Pfizer’s $99 Billion Bid for AstraZeneca Is a Tax Shelter

Pfizer’s $98.7 billion offer for AstraZeneca is hostile on multiple fronts: The London-based target has spurned the offer as too low, while the cost to the U.S. Treasury is potentially high.

As my colleagues Jesse Drucker and Zachary R. Mider reported today for Bloomberg News, New York-based Pfizer, by buying AstraZeneca, is trying to switch its official domicile from the U.S. to the U.K., where the corporate tax rate is due to drop to 20 percent from 21 percent in 2015. The corporate tax rate in the U.S. is 35 percent.

The move would essentially take place on paper only, as Pfizer Chief Executive Officer Ian Read has said the drugmaker would continue to be run from the U.S. In addition, the potential combined company, based in London, would have to pay U.K. taxes on profit earned only inside the U.K. itself, unlike companies domiciled in the U.S., which are taxed on their worldwide income. That difference could yield a windfall for Pfizer, if it brings some of the $69 billion of earnings it has stashed in overseas tax havens to London.

“What it’s all about is stripping the U.S. tax base,” says H. David Rosenbloom, an attorney at Caplin & Drysdale in Washington and director of the international tax program at New York University School of Law. “Congress has created this Frankenstein monster of a tax statute. No one in Congress has the faintest idea of what it says, yet then they’re ‘shocked’ when stuff like this happens.”

Mobilizing Pfizer’s overseas hoard for an AstraZeneca acquisition won’t be simple, Rosenbloom says. Pfizer can’t just spend the money to buy AstraZeneca stock, because that could be interpreted by the IRS as paying the U.S.-based parent a dividend that could be taxable at U.S. rates. So Rosenbloom expects Pfizer to use a foreign subsidiary to borrow against the untaxed earnings overseas, and to use the borrowings to purchase AstraZeneca. That way the money may never technically land on U.S. shores and may never be subject to U.S. tax, and Pfizer could take a tax deduction on the interest expense, Rosenbloom says.

“The way we’re structuring this is, it’s fully compliant with the appropriate laws,” Pfizer’s Read told analysts on a call today. He said that it’s his responsibility to ensure maximum return for shareholders, and that he doesn’t think the company’s plans conflict with the interests of the U.S. government.

Pfizer may also exploit another tax break in the U.K., this one aimed at incentivizing local innovation: a new 10 percent tax rate on profits attributed to U.K. patents.

If combined, Pfizer-AtraZeneca would likely reduce overall spending on research and development, says John LaMattina, a former chief of global R&D for Pfizer. Specifically, LaMattina says Pfizer has consolidated its oncology research in Southern California after previous acquisitions. Would it do so again after buying AstraZeneca, even though the London-based company is a leader in advanced cancer drugs and the U.K. is dangling rich tax breaks? “If I were a cancer researcher, I’d be worried,” LaMattina says.

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