Sunday 25 September 2016

Galen's role at start of tax inversion deals

Galen Holdings was the first to open the door for the controversial practice of tax inversions by major US pharmaceutical companies, writes Zachary R Mider

Zachary R Mider

Published 08/11/2015 | 02:30

The late Allen McClay, founder of Galen
The late Allen McClay, founder of Galen

Pfizer and Allergan are making progress on the year's biggest acquisition and are working toward agreeing on a deal as early as next month, people with knowledge of the matter said.

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If Pfizer succeeds in buying Allergan - and avoids billions of dollars in taxes - it can give a tip of the hat to a Northern Irish pharmacist named Allen McClay.

In 1968, McClay started a drug company in Craigavon, a half-hour drive from Belfast. Not one to stand on ceremony, he sometimes held employee meetings while he peeled potatoes in the company kitchen.

After McClay took his Galen Holdings public in 1997, he became one of his country's most active philanthropists and went on to be knighted by the queen. But his company may have had a bigger impact than McClay - who died in 2010 - ever could have guessed. For Galen Holdings has turned into a vessel that has allowed four successively larger American drug companies to pull their operations out from under the US tax regime. And Pfizer, the world's largest drug company, could be the fifth to renounce its US corporate citizenship and reduce its corporate taxes.

How a small pharmaceutical manufacturer based in Northern Ireland could poke such a hole in the US Treasury illuminates the bizarre nature of the US corporate tax system.

The American system allows foreign-owned multinational companies operating in the United States to pay lower taxes than domestically-owned ones. Since 2004, most US companies have been prohibited from simply declaring themselves foreign in order to erase the disadvantage. Instead, many of them are buying a foreign address through a merger abroad, in transactions known as inversions.

The dealmaking began not long after McClay left Galen Holdings in 2001. The chief executive officer, Roger Boissonneault, carried out a leveraged buyout and switched the company's legal address - from Craigavon to Bermuda, and then to Dublin in the corporate tax-friendly Republic. Meanwhile, he ran the company from New Jersey. In 2009, Boissonneault struck a deal to buy a drug business from Ohio-based Procter & Gamble that more than doubled the company's size - while at the same time cutting the P&G unit's tax bills.

Then in 2013, he sold the company to Actavis, a company whose HQ was not too far away from his offices in New Jersey. Although Actavis was bigger, it was able to adopt the Irish address - and more importantly, the low tax rate - under United States tax rules.

Over the next two years, Actavis made two other big US deals, acquiring Forest Laboratories and Allergan - the makers of Botox. Between the two of them, the deals more than doubled Actavis's sales again. And they generated about half a billion dollars of annual tax savings. The combined company is now known as Allergan.

But how could companies save so much just by becoming Irish? The US has the highest corporate tax rate in the developed world - 35pc - combined with an unusual policy of taxing the income of US companies' foreign subsidiaries. Foreign-owned companies can minimise US taxes by keeping their American operations separate from the rest of their corporate structure. Many companies that invert choose Ireland, with its lower corporate income tax rate of 12.5pc, or the UK, which doesn't tax foreign earnings.

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