First published in BNA Bloomberg Tax Planning International, 31 May 2016.
In recent months, the US has shown overt aggression towards tax-motivated planning schemes, with a particular focus on US multinational enterprises (MNEs) attempting to move profits offshore, often to low-tax territories, such as Ireland. 2014 and 2015 saw a spate of corporate inversions, particularly focused within the pharmaceutical industry, whereby US groups merged with foreign competitors, and in the process changed their tax residency to a more favourable tax jurisdiction. Similarly, if less public, a common business planning technique is to transfer the location of intangible property (IP).
While businesses frequently have commercially strategic reasons for moving IP, relocating IP to low-tax jurisdictions (and theoretically reallocating profits in the process) is often used as an alternative mechanism of reducing a group’s effective tax rate. As is widely known within the tax universe, the Organisation for Economic Development (OECD) has tasked itself with combatting base erosion and profit shifting (BEPS).
BEPS includes shifting profits from a high-tax territory to a low-tax territory without appropriate substance, and relocations of IP are firmly within the BEPS scope. While the US (although an OECD member and active participant in BEPS discussions) has in general kept the interests of businesses and protection of certain American ideals prioritised above immediate adoption of many of the BEPS recommendations, other nations (particularly some of the key destinations for US IP, e.g., Ireland) have been more welcoming towards these initiatives.
As merger and acquisition activity continues to flourish within the pharmaceutical industry and the executive suite remains under pressure to deliver higher investor returns and earnings per share, this article addresses the question: can pharmaceutical MNEs still generate significant tax savings through IP migration to Ireland?