Pfizer Moves Ahead with Allergan Inversion Deal

Pfizer Moves Ahead with Allergan Inversion Deal

Days after the U.S. Treasury Department released additional guidance that would further reduce the tax benefits of corporate inversions and make such transactions more difficult to achieve, U.S. global pharmaceutical company Pfizer Inc. and Irish Botox® maker Allergan Plc announced a planned deal that could be the largest corporate tax inversion in 2015.

Pfizer and Allergan said they plan a transaction that amounts to a “reverse takeover transaction” under Irish law. Ireland is a common redomiciling destination for U.S. corporations because of its low corporate tax rate.

Reuters reported that the deal is valued at $160 billion. To avoid potential restrictions, the transaction is being structured as smaller Irish-based Allergan buying larger U.S.-based Pfizer. The combined company will be called Pfizer Plc.

The Mechanics of Inversions

Corporate inversions generally involve a corporation in the United States attempting to minimize its U.S. tax liability by effectively moving its legal domicile to a lower-tax foreign jurisdiction.

At least a dozen U.S. companies pursued tax inversions from 2013 through September 2014, according to the July 7 final report issued by the Senate Finance Committee international tax reform working group.

These inversions occurred despite the fact that Congress and the IRS have attempted to restrict or eliminate the tax benefits.

Down the Road

Recently, the IRS issued a notice that previews regulations to be issued that would further reduce the tax benefits of corporate inversions and make such transactions more difficult to achieve.

While further action will be undertaken “in the coming months” to address such transactions (including potential guidance on earnings stripping), Treasury Secretary Jacob Lew acknowledged that “there is only so much Treasury can do to prevent” corporate inversions. Any definitive action to address corporate inversions must come from Congress.

EU probes alleged tax deal for McDonald’s

The European Commission opened a formal state aid investigation into what it believes to be unlawful tax deals Luxembourg granted to McDonald’s.

The Commission is examining tax rulings the grand duchy gave the fast food chain in 2009. According to the Commission, the fast food’s Luxembourg operation, McDonald’s Europe Franchising, has paid no tax in the grand duchy since 2009. However, during that time, the company received hundreds of millions of Euros in royalties from franchisees in Europe and Russia for the right to use the McDonald’s brand and associated services.

In one ruling, Luxembourg determined that the franchising company, which has branches in Switzerland and the United States, wasn’t “subject to tax in Luxembourg even if it was confirmed not to be subject to tax in the U.S. either.”

‘Double Non-Taxation’

In a news release, European Commissioner Margrethe Vestager, who is in charge of EU competition policy, stated:

“A tax ruling that agrees to McDonald’s paying no tax on their European royalties either in Luxembourg or in the U.S. has to be looked at very carefully under EU state aid rules. The purpose of Double Taxation treaties between countries is to avoid double taxation —not to justify double non-taxation.”

According to a Reuters report, a coalition of European and American trade unions accused the U.S. fast food chain of potentially costing European governments more than $1 billion in tax revenue from 2009 to 2013. The Commission stated in its press release that trade unions provided it with additional information.

The Commission’s formal probe would involve an assessment as to whether Luxembourg authorities selectively derogated from the provisions of their national tax law and the Luxembourg-U.S. income tax treaty, thus granting McDonald’s an advantage unavailable to other companies.

This is the third Luxembourg tax ruling the Commission has investigated. Officials continue to examine a deal granted to Amazon in 2003 and in October determined that a Luxembourg tax ruling granted to a Chrysler Fiat unit amounted to unlawful state aid.

Appeals Ahead

Luxembourg recently said it will appeal the Commission’s ruling to recover taxes from the Chrysler Fiat unit, Fiat Finance and Trade.

Separately, the Netherlands also recently said it will appeal a Commission decision that a 2008 Dutch transfer pricing ruling granted to Starbucks violated EU state aid rules. The Dutch government was ordered to recover millions of dollars from Starbucks.

Australia Discloses 600 Large Firms Paid No Tax in 2014

The Australian Taxation Office (ATO) took the unprecedented step of publishing a report with the tax details of 1,500 large corporate taxpayers, showing that nearly 600 of the largest companies operating in Australia paid no tax in 2014.

The Tax Transparency Report listed subsidiaries of the following U.S. multinational enterprises (MNEs): Apple, Boeing, Ford, Google, Halliburton, Hilton, and Microsoft.

Until now, the ATO has not publicized such sensitive corporate information. In a written statement, Australian Tax Commissioner Chris Jordan said, “No tax paid does not necessarily mean tax avoidance.” Warning to foreign entities With regard to foreign owned entities operating in Australia, however, Jordan warned:

“Investment from these companies should not be premised on no or very little tax being paid on significant profits generated in Australia. Some of these foreign owned companies are overly aggressive in the way they structure their operations. We will continue to challenge the more aggressive arrangements to show that we are resolute about ensuring companies are not unreasonably playing on the edge. If they do, they can expect to be challenged.”

Transparency Concerns

As countries have become more concerned about their sources of tax revenue, they have increased their focus on tax transparency measures. Since 2014, Australia’s Senate Economic References Committee has been investigating corporate tax avoidance and aggressive minimization in Australia.

Among other things, the committee launched inquiries into the need for greater transparency to deter tax avoidance and provide assurance that all companies are fully complying with Australian tax law.

The transparency report is an entity-by-entity listing of public and foreign owned corporate businesses reporting total income of AU$100 million or more in the 2014 financial year. The published information includes:

  • Name of entity shown on tax return,
  • Australian business number,
  • Taxable income, and
  • Tax payable.

Anti-avoidance Law

Publication of the report came shortly after the Australian Senate passed the 2015 bill on the multinational anti-avoidance law (MAAL). That law has been described as “a critical piece of legislation” to ensure that major international companies operating in Australia, but recording profits offshore, pay taxes in Australia.

The ATO “now has additional detailed information on how many of these companies structure their tax affairs to avoid paying their fair share” of Australian taxes, said Australian Treasurer Scott Morrison and Senator Mathias Cormann in a joint press release.

The 2015 MAAL includes provisions that will:

  • Require companies that avoid taxes to pay back double what they owe,
  • Negate certain tax avoidance schemes used by multinational entities (MNEs),
  • Set new standards for transfer pricing documentation and country-by-country (CbC) reporting by significant global entities,
  • Require private companies with total income equal to or exceeding US$146 million to disclose specific tax information to the ATO annually, and
  • Compel large companies to file general purpose financial statements with the ATO.

The tax agency would pass those filings on to the Australian Securities & Investments Commission (ASIC), which enforces company and financial services laws.

Next Step

The bill still must be approved by Royal Assent.

Jurisdictions with FATCA Intergovernmental Agreements

Heres a list of the jurisdictions that, as of December 31, 2015, have signed intergovernmental agreements (IGAs) under the Foreign Account Tax Compliance Act (FATCA). The law was enacted by Congress in March 2010 to target noncompliance by U.S. taxpayers using foreign accounts.

FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

Under Model 1 agreements, FFIs report information on U.S. account holders to their national tax authorities, who in turn will report to the IRS.

In Model 2, FFIs report information directly to the IRS.

The list includes the dates when they signed.

Note: There are additional jurisdictions with agreements in substance.