You may have heard about Pfizer’s unsolicited offer in May to buy United Kingdom-based AstraZeneca. And while there are a number of reasons for the potential deal, tax was widely reported as a significant one. One publication estimated Pfizer’s savings to be more than $1 billion per year.
The bid comes at a time when many companies can report tax savings if their headquarters are located outside the United States in a jurisdiction that has a lower tax rate. These tax-conscious transactions are fact-specific, but even for companies that have no such current merger plan, addressing international tax planning may still provide significant current or future tax benefits.
Thinking globally. Many companies have long thought about their business operations from a global perspective for several reasons: marketing products in global markets, locating operations near engineering and research talent, and locating distribution centers for global reach.
Governments have recognized the value of attracting well-paying jobs and have adjusted their tax policies accordingly. Over the past decade, countries such as the Netherlands, Ireland, the United Kingdom and Australia have introduced tax incentives designed to lure life sciences, technology and other IP-based companies to relocate their research and development (R&D) efforts. (While the U.S. R&D tax credit expired at the end of 2013, it’s expected to be retroactively reinstated.)
What’s stopping you? Although the potential benefits of international structuring are significant, most executives at technology and life sciences companies are so focused on R&D efforts that they haven’t spent much time thinking about tax structuring.
In addition, there’s still a widespread belief that international tax incentives are limited to larger companies already shipping products. Why spend time and money now for benefits that may be a long time coming, if at all?
But it’s far better to consider international tax planning sooner rather than later. Current tax incentives can help your company now, and planning can lower your overall tax rate in the future.
Next steps. First, consider your long-term business strategy. Do you plan to manufacture and distribute your products directly, contract out these activities or license your products for others to produce and sell? Do you have relationships with respect to your research, future sales or funding—for example, through a strategic partner? Also consider the type of IP you own and where it is in its life cycle.
There are other factors to consider, including legal and administrative costs, specific country audit and reporting requirements, and the fact that your management team may have its hands full getting products to production.
It typically takes months to consider all the options, determine a course of action and structure your company accordingly. With careful structuring, your company can reduce or offset a portion of its early R&D expenditures and enjoy other tax advantages through its commercialization, growth and maturity stages.
Richard Croghan is a partner at Moss Adams LLP. He works with technology and life sciences companies on IPO registration statements, the R&D tax credit and other incentives, international tax planning, mergers, acquisitions and reorganizations. You can reach him at (415) 677-8282 or richard.croghan@mossadams.com.
