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Pfizer bid for AstraZeneca: 'punitive' US tax regime may drive increasing UK life sciences investment, says expert

Out-Law News | 01 May 2014 | 11:22 am | 3 min. read

A "punitive" US tax regime, potential tax breaks on offer in the UK and the ability to tap into existing expertise in pharmaceuticals in the UK may help persuade US businesses to invest in the UK life sciences industry, an expert has said.

Tax specialist Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that the bid that US pharmaceuticals giant Pfizer has launched to takeover AstraZeneca (AZ) may signal the start of a trend towards increasing cross-Atlantic interest in investing in UK-based life sciences businesses.

In a statement released earlier this week, Pfizer chairman and chief executive Ian Read said that the company has "great respect" for AZ's "innovation-driven biopharmaceutical business" and added that the UK "has created attractive incentives for companies to manufacture products and maintain and protect intellectual property (IP)". Read also said Pfizer sees a takeover of AZ as benefiting patients because of the two businesses' "shared commitment to R&D" into new treatments.

US tax rules may be another factor influencing Pfizer's interest in AZ, Self said.

"The US is almost unique in still subjecting foreign dividend income to full taxation - over the last 10 years, many countries, including the UK, have moved strongly towards an exemption system," Self said. "It is common for US multinationals to accrue significant amounts of income in low-taxed jurisdictions, by holding IP there and benefiting from various features of the US 'controlled foreign corporation' regime, such as the 'check the box' rules. Once the cash is offshore, the potential tax cost of repatriating it to the US makes it much more attractive to find other homes for it - such as making foreign acquisitions."

Self said that the "very competitive" UK tax regime may also be a factor in shifting business and investment across the Atlantic.

"A few years ago, we saw companies such as Shire, UBM and WPP leaving the UK for Ireland or Switzerland - the tide is now flowing the other way, and indeed some of those who left are now looking to return," she said. "The dividend exemption is clear, and the UK controlled foreign company (CFC) rules are now focused on targeting income which has been 'artificially diverted' from the UK. Interestingly, where IP is moved offshore from the UK, it will be difficult to qualify for CFC exemption - but where it originated from another jurisdiction, such as the US, there is unlikely to be a UK CFC cost."

"Pfizer also highlighted the UK's Patent Box regime, which opens up the possibility of a 10% tax rate on qualifying IP income. Perhaps part of the calculation is that a government-backed 10% rate is more likely to be a stable regime than using tax havens to get an even lower rate? The OECD work on base erosion and profit shifting (BEPS) may make it increasingly difficult to accumulate income in a zero tax regime, with proposals for enhanced withholding tax or denial of deductions for payments made to tax havens," the expert added.

The Patent Box allows companies to elect to apply a 10% rate of corporation tax on all profits attributable to qualifying patents, whether paid separately as royalties or embedded in the price of products. Qualifying patents are those granted by the UK's Intellectual Property Office or the European Patent Office. The main rate of corporation tax is 21% at the moment, although this will fall to 20% in April 2015.

In its statement, Pfizer said that it would anticipate having "management in both the United States and the United Kingdom" if its hostile takeover of AZ is successful, and Self said that there are good reasons why the company would wish to take this approach.

"It is worth noting that, from a UK perspective, all that will be needed to establish a UK holding company is a relatively small number of senior employees, and genuine management and control of the top company in the UK," Self said. "So having a UK parent will not, of itself, create significant numbers of jobs in the UK or even protect those that already exist - although it is to be hoped that the existing pharmaceutical expertise in the UK will remain a strong commercial reason to invest here."

"Paradoxically, the UK tax system will also make it easier to reinvest into the US, since profits can flow up to the UK free of tax and then back out again - enabling funds to reach the US for new investment without suffering the current punitive tax cost. It remains to be seen whether the US will change its own tax system in response to the current flight of capital - but given the fine balance of political power, making major change will not be easy," she said.