A new report from Citi Research focusing on the possibility of corporate tax reform and the potential impact on the “Spec Pharma M&A Party” was published yesterday. Citi analysts Liav Abraham, Nirav Jhaveri and Andrew S. Baum argue that tax reform, if it happens at all, is more likely in the 2015 time frame. They also point out that any tax reform that actually becomes law is likely to be significantly watered down from current suggestions, and therefore unlikely to have a major impact on the ongoing M&A frenzy in the specialty pharma sector (and only a limited impact on M&A more generally).

Tax reforms

Details of proposed corporate tax reform

The Citi analysts point to sources at the White House for details on the proposed corporate tax reform. “According to senior officials in the Obama Administration, the White House intends to propose more stringent tax rules for US companies with overseas operations, in order to limit tax avoidance via strategies such as profit shifting. The proposals are expected to be included as part of the fiscal 2015 budget package, to be released on March 4.”

Impact likely to be minimal

Abraham et al argue that the implications for U.S. pharma companies may include ending the use of U.S. debt vehicles (for which interest expenses are deducted at a higher US corporate tax rate) to fund operations abroad (where interest income is potentially taxed at a lower tax rate). However, many past attempts to curtail this practice have been unsuccessful. White House sources also say the proposed tax reform may curtail the creation of holding companies in tax-friendly jurisdictions through the acquisition of foreign businesses by taxation of the Newcos at the higher U.S. tax rate.

The report also mentions that the proposed corporate tax reform legislation is not going to effect the commonly-used “redomocile of US companies via the acquisition of Irish-based entities” strategy. Furthermore, the report opines that it is extremely unlikely that any of the proposed reforms would be implemented retroactively.