As Pfizer Fights it Out in Britain, US Lawmakers are Making Their Move in the Long Game
While British attention in the Pfizer-AstraZeneca takeover battle has been focused on clashes between MPs and Pfizer chief executive Ian Read, events have been unfolding across the Atlantic which could have an infinitely greater bearing on where the pharma giant eventually conducts its business.
As UK representatives fret over the implications for AstraZeneca jobs and R&D, their US counterparts appear to have woken up to a fundamental threat to their economy and started taking positive steps to fix it - with a piece of fancy legislative footwork which could have a long-term impact on US investment around the world.
The fact is that Scots-born Read has been eyeing AstraZeneca for some time and for a variety of reasons - not just the tax benefits which would accrue from removing £63 billion of its current cash pile from US jurisdiction.
Pfizer will almost certainly also have been attracted by the UK government's positive attitude towards encouraging innovation and technological expertise through the judicious use of research and development (R&D) tax relief.
This scheme, which has pumped billions of pounds into British companies since it was introduced, has been enhanced at almost every Budget, and has created a regime based on security and permanency to foster long-term investment.
In America, by contrast, the tax credit for business R&D is one of dozens of tax laws which are temporary and have to be continually extended. It has been renewed 15 times since 1981 and, in fact, technically expired at the end of last year.
Clearly this fosters an environment of uncertainty and instability, and it is hardly surprising that research-heavy multinational enterprises such as pharmaceutical companies seek calmer waters in which to fish.
However, as part of a drive towards comprehensive tax reform, Republicans want to make R&D tax credit permanent and, last week (May 9), the House of Representatives voted to enshrine a 20% tax break in the federal tax code.
The cost is enormous - some $150 billion over 10 years, and Democrats are insisting on new tax rises to offset it, so the proposal faces prolonged legislative in-fighting before it ever lands on President Obama's desk.
But it is indicative of US thinking on the necessity of encouraging domestic innovation as an integral part of the economic recovery and establishing research as one of the most important catalysts for growth.
If Pfizer's bid succeeds, the maker of Viagra has committed to locating 20% of the company's global R&D workers in the UK and it has been open about the substantial tax saving which would accrue from re-domiciling in the UK.
Read has pointed out that there is a 20% corporation tax rate in the UK while, because of dividend requirements, it would probably be a 38% in the US. If he had to do the deal in the US, negative synergies would kill it, so he has to domicile in Britain.
He has told MPs that "some" R&D jobs will be cut in AstraZeneca and confirmed that the company would be split up, making its constituent parts more attractive to potential buyers.
The bottom line in this dramatic bid is that Pfizer's move is a significant vote of confidence in the UK economy and it illustrates that, in a fluid and interconnected world, enterprises will go where the conditions which allow them to flourish are most favourable.
But as the vote by US Representatives also shows, conditions can quickly and unexpectedly change and, though there is no reason to doubt Mr Read's five-year commitment to the UK, that is a very short time in macro-economic terms.
If the US does work towards a more favourable climate for domestically-located research and development, it may not just affect the enlarged Pfizer's long-term strategic thinking - it could sway the decision-making of multinationals across the board.
Brian Williamson is managing director (Scotland) at R&D tax relief specialist Jumpstart. www.jumpstartuk.co.uk