In July 2013 the Irish pharma company Elan was acquired by the US based Perrigo group for $8.6 billion (£5.6 billion). Ireland’s corporation tax rate was one of the main attractions for Perrigo and the deal was said to give Perrigo substantial tax savings due to a corporate tax inversion.
The Irish 12.5 % corporate tax rate compared US rate of 30 % was further augmented by the trading losses built up over a number of years by Elan in its business as a drug development group. That meant that even with a $3.25 billion transaction like Elan’s sale of the rights to the multiple sclerosis drug Tysabri the company would still not have to pay any tax.
The low-tax scenario envisioned by Perrigo did not last for long.
First Perrigo was issued a $1.9 billion tax bill (excluding interest and penalties) by the Irish tax authorities for incorrect transfer pricing related to its sale of a 50% interest in Tysabri to Biogen, another US pharmaceutical company, eight months before Perrigo acquired Elan.
Elan received up front payment of $3.25bn (€3.14bn) and a substantial ongoing royalty stream from the transaction. These profits was initially taxed as trading income at 12.5 %, but the Irish Revenue Service held it should have been treated as a chargeable gain and therefore taxed at 33 %.
Perrigo has disputed the assessment and argues that Elan had conducted business in Ireland for many years on foot of a certificate from the Minister in Finance, entitling the company to a 10 % tax rate (increased to 12.5 % in 2005). Hence, Elan had a legitimate expectation that the sale of intellectual property would be taxed at the same corporate tax rate.
The High Court hearings in the Irish $1,9 billion case will commence in April 2020.
Later, in april 2019 it was disclosed that Perrigo had also been issued an additional $873 million tax bill from the IRS. The US tax assessment is described in a Perrigo SEC filing:
On April 26, 2019, Perrigo Company plc (“Perrigo” or the “Company”) received a revised Notice of Proposed Adjustment (the “NOPA”) from the U.S. Internal Revenue Service (“IRS”) Examination team auditing Athena Neurosciences, Inc. (“Athena”), for the tax years ending December 31, 2011 – 2013.
Athena was acquired as a U.S. subsidiary by Elan Corporation, plc (“Elan”) in 1996 and Perrigo acquired Elan through the December 2013 business combination between Perrigo’s predecessor and Elan.
The proposed adjustment is based on the IRS’s construction of events in 1996 and proposes a payment of $843 million, which represents additional tax and a 40% penalty.
The draft asserted that Elan owed Athena additional royalty income related to its discovery and preliminary development of Tysabri® prior to the acquisition of Athena by Elan in 1996. In response to the draft assessemt, Perrigo provided the IRS with substantial additional documentation and had discussions with the Examination team as recently as June 2018. Since then, Perrigo received no other communications from the IRS until receipt of the revised NOPA.
Athena originally reported royalties based on transfer pricing documentation prepared by its external tax advisors. The draft assessment carries forward the theory that when Elan took over the future funding of Athena’s in-process R&D in 1996 it should have paid a substantially higher royalty rate for the right to exploit Athena’s IP. The IRS Examination team developed a theoretical 24.7% license royalty rate based on the financial data contained in the original purchase price allocation done in 1996. The proposed income adjustments were then generated by applying that royalty rate to Tysabri® sales revenue.
Perrigo strongly disagrees with the IRS income position. Perrigo also believes that the original transfer pricing methodology was appropriate and that no penalty should apply. Perrigo will pursue all available administrative and judicial remedies, including potentially those available under the U.S. – Ireland Income Tax Treaty to alleviate double taxation, given that Elan and its subsidiaries already reported the income claimed by the IRS in Ireland.
While Perrigo believes its position to be correct, there can be no assurance of an ultimate favorable outcome, and if the matter is resolved unfavorably it could have a material adverse impact on Perrigo’s liquidity and capital resources. Based on the current facts and circumstances, the Company does not expect this development to materially impact its financial statements. It is important to note that no payment of the additional amounts is required until the matter is resolved administratively, judicially, or through treaty negotiation, nor does the Company anticipate that the NOPA will have a material adverse impact on its liquidity position, unless and until a final determination of the matter is reached that is adverse to the Company, which could take a number of years.