New rules in pharmaceutical industry playground

© Shutterstock
© Shutterstock


In the United States of America, new regulations became effective in September 2014 that regulate the taxation of big international groups, including as well American pharmaceutical industries.

Anxious to stop a trend of US companies that want to evade taxes in the United States, the Treasury Department announced in late September a series of measures with immediate effect, complicating the possibility of moving its headquarters. The new regulation is not retroactive, but applies to current transactions that have not been completely finalized.

The US executive has responded to the recent proliferation of these operations known as « corporate inversions« . These practices are based on a simple and legal principle: a company that buys a rival abroad can install its headquarters and tax centre while retaining its activities and structures of the United States.

Under the previous regulations, at least 20% stake in the new company created by the merger and acquisition must be held by new shareholders to allow it to tax domicile abroad. To artificially inflate the share and get around this rule, some companies previously included « active passive », but they will no longer be allowed to do.

So even if, the United States submit to tax all profits from their businesses, including those garnered outside their territory, they can also store some outside, indefinitely and out of reach of the taxman. By domiciling abroad, multinationals are free to return those profits to their accounts without having to repatriate to the United States where they would be taxed at 35 %. The amounts raised abroad are far from trivial and would total more than 2,000 billion.

The government justifies this new regulation by the erosion of tax revenues unfairly place a heavier burden on other taxpayers, including small businesses and American workers. It intended to prevent US companies to tap into the earnings they have accumulated abroad, sheltered from the IRS, to finance mergers and acquisitions. In conclusion this is a big loss for the US government.

For example, this summer 2014, the US pharmaceutical company Mylan announced the acquisition of foreign operations of his compatriot Abbott and its reorganization into a holding company based in the Netherlands. Mylan with this plan could reduce its tax rate from 35% to 21%.

But because of new U.S. Treasury tax rules that made this kind of deal less attractive. Maybe in the longue run this type of sector will be less competitive because nowadays pharmaceutical industries system are based on external growth. This theory is easily illustrated with the case AbbVie and Shire. Their announced merger thus became the main victim of the new US tax severity against offshoring.

AbbVie announced July 18, 2014 the acquisition of Shire for approximately € 40.5 billion. This transaction is mostly motivated by the opportunity to pay less tax through « tax inversion » mechanism, presented previously. AbbVie also wanted to reduce its dependence on Humira®, a treatment for rheumatoid arthritis, which represents 60 % of turnover of the group.

In fact, at the conclusion of the proposed acquisition, the US group had said it expected the creation of a new structure, which will be located on a British island. With the previous regulation, the effective tax rate of the new organization could have been 13% against 22% by 2016 for AbbVie currently in the United States.

Since the promulgation of the new tax law, the Management Board finally have decided to give up the acquisition of Shire, and both laboratories agreed to end a mutual agreement. The pharmaceutical company will receive $ 1.6 billion from its rival AbbVie. This indemnity shall be the only compensation that will pay the US company.

Therefore these series of measures unveiled by the Obama administration complicates the tax exile of American multinationals which are often tempted to artificially domiciliate abroad to evade taxes in the United States and should result in the coming years substantial changes to the strategies of the companies concerned. Thus, these new US tax rules against « tax OPA » may discourage US companies.






AFP. Levée de boucliers contre l’exil fiscal des multinationales américaines. (novembre 2014)

AbbVie. (2014, 20 octobre). « Announcement of termination of proposed AbbVie and Shire transaction ».