As the Irish government considers closing an infamous tax loophole for corporations, Wall Street has been scrambling to gauge the effect on the pharmaceutical industry. So far, the prognosis seems that damage will largely be minimal.
Known as the ‘Double Irish,’ the loophole allows companies to send royalty payments for intellectual property from one subsidiary registered in Ireland to another, which resides for tax purposes in a country with no corporate income taxes. So instead of paying the usual 12.5% corporate tax rate in Ireland, these companies pay something less than that.
The change, which has been pushed by the European Union, would not go into effect for six years, though, which offers a great deal of time to adjust. Several large drug makers, such as Merck, Amgen and Bristol-Myers Squibb BMY +0.08% have told analysts they do not use the ‘Double Irish, ’ while others are evaluating. And so, there is considerable interest in the potential impact and analysts are scurrying to review implications. Here is a sampling of what the wags are saying…
– “The benefit of Irish taxes is depending on how a company structures its business – i.e., how much of its intellectual property is domiciled in Ireland,” writes Deutsche Bank analyst Robyn Karnauskas in an investor note. “Companies enjoying current tax benefits in Ireland will likely be grandfathered in and see no impact for the next four to five years, at a minimum. The impact would depend on whether or not companies are using the ‘double tax structure’ and to what extent they are using it.”
– Drug makers based in the U.S. have a “handful of alternatives” they can use to mitigate a rise in tax rates after the grandfather period ends, suggests Leerink analyst Jason Gerberry. For instance, they can re-route profits through the Netherlands, which is a known alternative; and return intellectual property assets to Ireland in order to take advantage of deductions that could yield similar or only slightly higher tax rates. All told, he writes, incremental tax rates on off-shore profits would rise 2.55 to 3% maximum.
– BMO Capital Markets analyst David Maris writes that Allergan confirms using the tax structure’ but already incorporated potential changes in Irish tax law to forecasts. However, he adds the drug maker “cannot know precisely what impact the new regulations might have,” but has been monitoring the political situation “for some time.”
– Meanwhile, Actavis acknowledges using the ‘Double Irish,’ but only for a few products that came with its acquisition of Forest Laboratories and these are apparently older assets, suggesting a modest impact. Umer Raffat at ISI Group writes that “if I were to use worst-case assumptions, I calculate that 3% of Actavis earnings per share is at risk… and even that won’t happen immediately.”
– Finally, Ronny Gal of Sanford Bernstein writes in an investor note that “some investors we spoke with have ‘connected the dots’ arguing [the recent] U.S. treasury move against [deals using] tax inversions and the Irish change of rules should be viewed as part of a concerted move against companies paying low taxes.
“We think this is a stretch,” he writes. “We would argue that Ireland is very unlikely to change its positioning as a low-tax country. This has been a very successful part of the nation’s economic program. What the EU has been arguing is that Ireland has been used as a conduit to parking IP in offshore countries, which is unfair to the rest of the industrialized countries. The change made by Ireland is reasonable and implementation is industry-friendly, providing over five years of warning to allow for tax planning.”