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US Major Pharmaceuticals
COMMENT
Tax Reform Lacks Detail, Worst Case Scenario
Materially Negative
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The Market is left confused regarding the specific intent of President
Obama’s budget proposal reference to "implement international
enforcement, reform deferral and other tax reform policies." There could be
many important nuances to the plans which are projected to generate $210Bn
over 10 years.
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The ‘worst case scenario’ that we could imagine is a complete elimination of
the foreign profit tax deferral and a 35% consolidated tax rate for all companies.
This would be a material negative for all of our names (Exhibit 1) with 2010
earnings decreasing from 6.8% for PFE/WYE pro forma to 22.2% for SGP. Of
course, this negative would hurt many other important sectors in the U.S. Market.
■
The risk is that the revenue projections from reforming tax deferral are large and
populist politics are against the companies. On the flipside, raising taxes in a
recession is controversial and corporations could threaten to relocate
headquarters outside the US, which would bode poorly for employment.
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In Obama's campaign he said it was his desire to broaden the corporate tax
base and eliminate special preferences. He specifically mentioned reforming tax
deferral to end the incentive for companies to ship jobs overseas. The one-liner
is his budget proposal is very vague, implying little detail and possibly
significant future debate. The projections go from $15Bn to $20Bn to $25Bn
and then increase by $1Bn/year. These broad estimates have the appearance
of placeholders, put in to meet the deadline with details to be determined later.
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Two possible examples for reforming tax deferral are the recently
reintroduced bill by Senator Dorgan and the Rangel Bill (expected to be
reintroduced this year by the House Ways & Means Chairman).
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The Dorgan Bill proposes eliminating deferral attributable to products of
US subsidiaries produced elsewhere and imported into the US. No savings
estimates are available for the Dorgan Bill.
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Rangel's proposal offered $107Bn over 10 years and would delay
deductions allocable to foreign expenses until repatriation of foreign income,
thereby encouraging companies to "voluntarily" forego the deferral.
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Further insight into Obama’s intentions are expected in the coming weeks, or by
early April when a more detailed budget proposal is submitted to Congress.
■
A transcript of a recent conference call we held with Health Policy Expert George
Olsen, where we discussed tax deferral reform and other key aspects of the
President’s budget proposal, is included in the back of this note.
302797.pdf
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