Pfizer move to join tax-driven deal-making raises red flags in U.S

By Kevin Drawbaugh (Reuters) - A wave of tax-driven overseas deal-making by U.S. companies gained momentum with drugmaker Pfizer Inc's announcement on Monday that it had made takeover bids for UK rival AstraZeneca Plc , fuelling political concerns about tax "reflagging" strategies. Pfizer said it wants to buy AstraZeneca and merge the two companies into a UK holding company with a UK tax domicile, while maintaining its operational headquarters in New York. It would likely be the largest deal ever done that included such a so-called tax "inversion." If a deal goes through - which is far from certain given AstraZeneca has so far rejected Pfizer's overtures - it would likely mean a loss of corporate tax revenue for the United States, and a lower effective tax rate for the combined entity than the two companies pay now. For 2013, Pfizer disclosed an effective rate of 27.5 percent and global cash income tax paid of $2.87 billion (1.7 billion pounds), including income taxes paid to the U.S. government and other state and foreign tax authorities, based on company filings. The Pfizer proposal triggered concern in Washington. "This further demonstrates the urgency for tax reform," said a spokeswoman for Democratic Senator Ron Wyden, chairman of the tax-writing U.S. Senate Finance Committee. "Now is the time to undertake comprehensive reform to ensure our country stays competitive on a global stage and continues to be the best place for corporate investment," the spokeswoman said. Governments worldwide are increasingly wary of corporate tax avoidance. The Obama administration earlier this year included a proposal in its 2015 budget to clamp down on deals like the one Pfizer is pursuing. The administration's proposal is unlikely to go anywhere though with Congress deadlocked on tax issues. The U.S. Internal Revenue Service on Friday issued a separate notice limiting shareholders' tax-free treatment in inversion transactions. TAX-DRIVEN DEALS RAMP UP Since the 2008 global financial crisis, about two dozen U.S. companies have shifted their legal tax residences to lower-tax countries via corporate deals, versus about the same number over the previous 25 years, a Reuters review of transactions showed. Ireland, the Netherlands, Switzerland, Canada and Britain lately have been the most common destinations of U.S. companies seeking new tax domiciles, replacing preferred havens of years past such as Bermuda and the Cayman Islands. Buying AstraZeneca would allow Pfizer to escape the comparatively high 35-percent U.S. corporate income tax rate. The United States has one of the highest such tax rates in the world, though most multinational companies pay less than that due to plentiful loopholes. Pfizer spokeswoman Joan Campion said the UK holding company structure being contemplated “provides for a more efficient tax structure that doesn’t subject AstraZeneca’s non-U.S. profits to U.S. tax.” Campion declined further comment. Inversions allow U.S. corporations to escape that high rate by moving to a lower-tax country, via an acquisition, a merger or the creation of a new holding company. They can also reduce overall U.S. profits in a process known as "earnings stripping" that involves loading up the legacy U.S. business with tax-deductible debt, said academics and private tax watchdog groups. The AstraZeneca transaction would also give Pfizer a way to spend some of an estimated $69 billion it is holding abroad under a law that lets U.S. companies shelter overseas earnings from U.S. taxes by keeping them out of the United States. OMNICOM-PUBLICIS DEAL Another large inversion deal is New York advertising firm Omnicom Group Inc's proposed $35-billion merger with Paris rival Publicis Groupe SA