Tax inversion: Treasury actions a statement of intent, but Pfizer / AZN would still be accretive
* US Treasury takes 4 measures to limit benefits of tax inversion
Yesterday, US Treasury announced 4 actions to make corporate tax inversions tougher:
1) preventing 'hopscotch' loans, 2) preventing restructuring, 3) preventing the transfer
of cash/property, 4) making it harder for the US parent to lower ownership of NewCo
below 80%. These 4 measures, to apply to any deal that closes from now, seem a
statement of intent, although this is clearly not the final word: "Treasury will continue
to examine ways to reduce the tax benefits of inversions." We give our preliminary view
on these points below. This all makes a Pfizer bid for AZN less likely, in our opinion –
though these measures alone do not seem to rule out all tax benefits. We still argue
AZN would be EPS-accretive for Pfizer even without any tax inversion benefit (see page
2) – our stand-alone, pipeline-driven price target for AZN remains GBP50 per share.
* Action 1: hopscotch loans designed to avoid tax are now a target
Our interpretation is that this action stops "hopscotch" loans / creative loans from the
CFC: the previous practice where loans made by the foreign CFC to the US parent were
classified as foreign property, and therefore not taxed as a US dividend. This enabled
the US co to minimise its taxable earnings, and hence minimise group tax. We believe
these hopscotch loans were one of the significant drivers of the benefits of tax
inversions, so this measure looks as if it will have a meaningful effect on the tax
inversion benefits achievable
* Actions 2 and 3: restrictions on restructuring and transfer of cash/property
Action 2 is designed to prevent a foreign parent taking control of NewCo by
restructuring, and Action 3 prevents a new foreign parent from selling its stock in the
former US parent, in exchange for cash or property.
* Action 4: makes it tougher for former US parent to lower stake of NewCo
This action "strengthens the requirement that the former owners of the U.S. entity own
less than 80%" of NewCo. This looks less relevant to situations such as AZN and Shire;
the US acquirer seems to genuinely comply with the 80% maximum ownership. This
seems likely to impact those inversion deals where the US holding is very close to 80%.