Acquisitive Inversion: Pfizer-AstraZeneca

If a group of companies is owned by a US based common parent, international tax planning can be difficult because as money flows up, it flows into (if it didn’t start within) the US tax system. Many US parent companies have used offshore subsidiary structures to create pockets of capital outside the US tax system.  The downside to this structure is that they cannot make use of that money in the US (called a “repatriation”) without subjecting it to US tax.  The money is “trapped” offshore.

If the parent company is outside the US, this repatriation problem doesn’t apply. However, the US has a significant body of tax law preventing (by heavily taxing) the move of a US company to another country (“expatriating” that company) such as by reorganizing so that a new, foreign company is the common parent (called an “inversion”).

One way to overcome those restrictions is for a foreign company to acquire a US company. But, in a merger, particularly an equity-based one, it is difficult to say who acquired whom. This is where a US company can take advantage of acquiring a foreign company to expatriate without triggering anti-inversion tax. Whichever company is treated as “acquiring” the other, so long as the shareholders have the same economic ownership of the combined company and the combined company holds the same assets. So, by flipping an acquisition, it can go from a US acquisition of a foreign company to a foreign acquisition of a US company. If handled correctly, that foreign acquisition doesn’t trigger the anti-inversion laws. This is frequently called an “acquisitive inversion.”

Simplified diagram of an "acquisitive inversion"

Simplified diagram of an “acquisitive inversion”

This is the heart of the structure in the current deal between US-based Pfizer Inc. and UK-based AstraZeneca. What started out as an acquisition of AstraZeneca by Pfizer can (and appears to have been) flipped into an inversion. Pfizer and AstraZeneca were planning to merge, why not use it to reduce US tax going forward. Of course, the UK is not a “typical” destination for an inversion based on its tax rates.  The Netherlands or various Caribbean island nations are more typical, where tax rates can be effectively zero.   But if the deal is moving forward anyway, why not take advantage of the opportunity?

The NY Times’ website has an article How Tax Laws Distort the Pfizer Deal posted yesterday afternoon discussing the Pfizer-AstraZeneca deal, giving more context and a discussion of the deal from a business perspective.