Are Pfizer's promises enough to keep AstraZeneca's UK boffins, and UK boffindom in general, safe?

http://en.wikipedia.org/wiki/File:Tortoise_and_Scorpion.jpg

Pfizer’s pursuit of AstraZeneca brings to mind the old Persian fable of the Scorpion and the Turtle. The Scorpion wanted to cross a lake and asked the Turtle to carry it. The Scorpion promised the Turtle it wouldn’t sting it to death during the voyage because they would both die – Turtle by sting, and Scorpion by drowning. Half way across the Scorpion stung the turtle. As they were both dying, the Turtle asked the Scorpion why it had doomed them both. The Scorpion responded, “I couldn’t help it, it’s in my nature”. Now, there is a difference between Pfizer and the drowning Scorpion: Pfizer can swim.

Appearing before Parliament’s “Business, Innovation and Skills Committee” in May 2014, the Pfizer bosses were pretty open that a key interest in AstraZeneca was the tax advantages. However they, like the Scorpion, promised not to kill off AstraZeneca’s research & development (R&D) in the UK because to do so would harm Pfizer's tax avoidance interests. 

[For your convenience the time of the statement in the video is given in brackets before the quote: see bottom right hand corner of the video for the time] Ian Read, Pfizer CEO, said he would be

(10:49:30) “bringing in manufacturing [to the UK] that wouldn’t have come here without the Patent Box”.

“Patent Box” is a tax dodge promoted by the British Government. It allows companies to have their profits from exploiting intellectual property taxed at the extremely low rate of 10%. Pharmaceuticals is one of the industries that lives by income from intellectual property – their ownership of the clever ways to create drugs and treatments. Another example is the software industry. When you buy a carrot you pay for the actual carrot. When you buy a CD with a great game, you pay £40 not for the actual CD (worth 10p) but for the intellectual cleverness of the great game.

Quizzed by the MPs on the credibility of Pfizer’s commitment to maintain AstraZeneca’s scientific R&D, the Pfizer bosses claimed to have made legally binding commitments. Commitments that could be enforced by the UK’s Takeover Panel. However, the Pfizer CEO said more important than the legal enforcement was his word!

(11:04:50) “I am a man of my word, Pfizer is a company of its word”

(11:08:00) ”We are a highly ethical company, we keep our promises”

(11:19:00) “The strongest commitment is the one I make and the one our board of directors have made”

When asked whether he could provide examples of the Takeover Panel actually taking action against a company for not keeping its commitments, Read answered:

 (11:19:45) “No I can’t”.

Did Read mean he had checked and found that no action had ever been taken, or that he didn’t think it was worth checking as he knew there was nothing legally enforceable that could result in action being taken? Or had he forgotten to check? Of course, great leaders don’t get where they are today by forgetting to check.

Putting all the promises aside, there are two important pieces of tax legislation to be considered here.

1) US “anti inversion” law, to discourage companies shifting their tax domicile to havens, requires the company to have 25% of its operations in the country of tax domicile. 

2) UK “Patent Box” rules don’t actually require anything much in terms of employing staff in the UK, nor anything much else either.

According to the FT, as at May 2014 Pfizer had 77.7k and Astra Zeneca 51.5k staff. The AstraZeneca Annual Report for 2013 (Pg 173) shows just 7,200 staff in the UK. So we presume the US requirement of 25% includes all AstraZeneca worldwide staff, not just those in the UK. On which basis Pfizer could sack half the AstraZeneca workforce and still meet the US requirement of 25% of staff from AstraZeneca.

Patent Box rules are so limp it is impossible to parody them. Believe me I’ve tried. There is no requirement to employ people in the UK to benefit from the Patent Box 10% rate. If Pfizer decides to swing an axe at jobs in the UK, Patent Box won’t get in the way. Without sarcastic comment, here are links direct to HMRC’s Patent Box rules themselves:

• Qualifying Company http://www.hmrc.gov.uk/manuals/cirdmanual/CIRD210100.htm

• Development Conditions http://www.hmrc.gov.uk/manuals/cirdmanual/CIRD210200.htm

So what if Pfizer played the swimming scorpion and gave the death-sting to AstraZeneca? The UK would at least get Pfizer’s corporation tax. More corporation tax at the expense of jobs? Is it worth it?

Actually, the bulk of tax revenues come from people paying their income taxes on what they earn, and paying VAT on what they spend. (Not to mention other UK companies profiting, employing, and paying taxes on what they earn from people employed in the UK spending their money here). So would helping Pfizer avoid US taxes leave the UK quids in, even with the potential loss of UK jobs and damage to British science?

Coming back to the fable: there is also another reason a swimming scorpion might want to kill off a turtle. With the turtle gone there would be less competition for room in the water.