Pfizer Inc. (NYSE:PFE) has a tax inversion pill that will pump huge benefits out of the $106 billion mega-merger it is angling for with AstraZeneca PLC (LSE: AZN).
The company’s executives have publicly talked up the potential benefits of the merger, including more than $1 billion in tax savings per year.
As things stand now, AstraZeneca has once again refused the sweetened $106 billion offer made by Pfizer. But if they were to accept it, Pfizer would then be able to shift its corporate headquarters from New York City to Europe.
It’s a nice twofer that gives Pfizer the advantage of the enhanced European reach while at the same time giving it a readymade tax inversion strategy to hightail it out of Uncle Sam’s tax reach.
Pfizer, one of the world’s largest pharmaceutical companies, has been headquartered in NYC since it was founded in 1849 in Brooklyn.
A relocation of the company’s headquarters to Europe would result in the loss of billions of dollars in local, state and federal tax revenues.
Not to mention the loss of jobs and other spending that would follow the company’s headquarters across the Atlantic.
Note that an inversion doesn’t necessarily mean the company would move its operational headquarters. That would still be in NYC, but the official headquarters would be in Europe.
This would allow the company to bring in vast cash hoards that are currently being kept outside the U.S. in order to avoid the hefty tax bill it would attract. Pfizer currently keeps more than 70 percent of its cash reserves out of the U.S. to avoid being taxed on it as income.
In a conference call with investors, Pfizer CFO Frank D’Amelio said that if the holding company which would be the parent of Pfizer and AstraZeneca was located in the U.K., it would lower the company’s effective tax rate going forward.
Pfizer currently pays an effective tax rate of27.4 percent, while AstraZeneca’s effective tax rate is much lower at 21.3 percent. It is estimated that a single percentage point drop in Pfizer’s effective tax rate would mean annual tax savings of up to $200 million.
The U.K. additionally offers more tax benefits, including R&D tax credits and a lower tax rate on income from patents.
Be that as it may, any move by Pfizer to retain operational headquarters in NYC while avoiding paying corporate income tax would be seen by lawmakers and the powers-that-be in Albany and Washington D.C. as anotherinversion tax law fail. It would make federal approval for the merger more difficult, if not impossible.
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