AbbVie Moves Allergan Profits to U.S. in Partial GOP Tax Law Win

(Bloomberg) -- Allergan Plc, the drugmaker that emigrated to Ireland to avoid U.S. taxes in 2015, is now coming home -- at least partially.

Allergan’s income will generate some U.S. taxes because of a deal announced Tuesday for AbbVie Inc. to acquire the Dublin-based company, even though it will remain in Ireland.

Even the partial homecoming represents a win for U.S. lawmakers and regulators who have spent years trying to stop companies from moving their headquarters abroad to largely avoid taxes.

The $63 billion AbbVie acquisition is a big shift from 2015, when Allergan made moves to escape the U.S. tax net. The company underwent a complicated transaction known as a corporate inversion, in which it was acquired by Actavis, a smaller Irish drugmaker. Allergan continued to be managed from New Jersey but was able to use its Irish address for tax purposes, where the corporate rate is 12.5%.

“Unlike an inversion where U.S. income is transformed into foreign income, in the instant case, the polar opposite may well occur -- since, here, foreign income might be transformed into U.S. income,” Robert Willens, an independent tax consultant, said Wednesday in a note to clients.

A few years ago, this deal would likely have gone very differently -- Allergan would be the one buying AbbVie. In fact, Allergan tried this type of inversion with Pfizer Inc. in 2016, but U.S. Treasury Department quickly wrote regulations that effectively killed the transaction before the companies could close the deal. In 2014, AbbVie also tried to invert, but Treasury blocked the proposal.

The merger makes Allergan a special type of entity, known as a controlled foreign corporation, AbbVie spokeswoman Adelle Infante said. And under the 2017 Republican tax law that means Allergan will likely pay U.S. tax on some of its income, but not at the full 21% corporate rate.

The 2017 tax overhaul cut the rate from 35% to 21% and killed off nearly all remaining reasons for companies to invert. But Allergan will likely have to pay a new tax in the law on what is known as global intangible low-taxed income, or Gilti, said Albert W. Liguori, managing director at consulting firm Alvarez & Marsal Taxand.

"Allergan is now returning to become globally subject to U.S. tax rules,” he said. But “it may not necessarily mean a profound amount of tax."

AbbVie -- based in North Chicago, Illinois -- currently pays well below the new 21%, and said it will have an effective rate of 9% this year. Its future rate will rise to only 13%, the company said.

The Gilti tax is a guardrail levy intended to prevent large pharmaceutical and technology companies from shifting their profits outside the U.S. and into lower-tax countries. The law taxes U.S. companies with “excess” profits from overseas subsidiaries in countries with rates lower than about 13%. Irish subsidiaries, like Allergan will be following the deal’s completion, will likely pay some Gilti tax.

But the deal demonstrates that companies that have moved offshore aren’t looking to become permanent U.S. residents again, as President Donald Trump has promised.

“The companies are moving back into the United States, who have left, and now they’re coming back to us instead of being in other countries," Trump said in January.

The Allergan deal doesn’t signal that large corporations will be moving back to the U.S. or that companies with offshore operations will move those assets back, said Ryan Dudley, a partner at accounting firm Friedman LLP in New York.

“There remains a significant amount of political risk within the U.S. in relation to whether
there could be a change in the U.S. leadership that may result in some increases to the corporate tax rate,” he said.

Representative Kevin Brady, the top Republican on the House Ways and Means Committee, said in a statement Tuesday that the old tax code pushed American companies offshore and now they can “domicile here and stay competitive throughout the world.”

But even paying taxes to foreign countries, such as Ireland, and some Gilti tax to the U.S., companies can end up with lower overall tax bills than if they fully operated in the U.S., said H. David Rosenbloom, an international tax lawyer at law firm Caplin & Drysdale and a former Treasury official. Gilti is an “incentive” for companies to “chase foreign assets,” he said.

“It’s not like Allergan is becoming a U.S. company," Willens said. “It just has a new owner.”

--With assistance from Sony Kassam and Drew Armstrong.

To contact the reporters on this story: Lynnley Browning in New York at lbrowning4@bloomberg.net;Laura Davison in Washington at ldavison4@bloomberg.net;Cynthia Koons in New York at ckoons@bloomberg.net

To contact the editors responsible for this story: Wendy Benjaminson at wbenjaminson@bloomberg.net, Gregory Mott

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