Endo to Pay Executives’ $60 Million Tax Bill for Irish Address

May 15, 2014 6:40 am ET

May 15 (Bloomberg) -- Endo International Plc, one of a half dozen U.S. drugmakers that recently took Irish addresses to save on taxes, said it plans to spend $60 million to pay personal tax bills incurred by top executives in connection with the switch.

A pretax charge for that amount contributed to the company’s $437 million loss in the quarter ended March 31, Endo said in a regulatory filing last week. The costs stem from a special penalty Congress imposes to discourage executives from reincorporating their companies in tax havens.

Endo, headed by Chief Executive Officer Rajiv de Silva, changed the incorporation of its parent company to low-tax Ireland in February. Since then, the practice of switching legal domiciles, known as “inversion,” has attracted attention in the U.S. Congress after Pfizer Inc. announced its plans to buy London-based AstraZeneca Plc and become a British company.

Senator Carl Levin, a Michigan Democrat, yesterday called for a moratorium on the transactions and said he would introduce related legislation this week. Proposals from Levin and other Democrats have little chance of becoming law quickly because Republicans want to address the issue as part of a broader revamp of the tax code.

A 2004 anti-inversion law imposes a 15 percent tax on the value of options and restricted stock held by top company officers and directors of some inverting companies. Last year, Endo agreed to acquire Paladin Labs Inc., a specialty drugmaker, for $1.6 billion. Even though Paladin was based in Montreal, tax rules allowed Endo to use the transaction to switch its incorporation to Ireland.

Malvern to Dublin

Endo estimated that the Paladin transaction would save $75 million a year, including tax savings and other benefits. Previously based in Malvern, Pennsylvania, Endo now says its headquarters is in Dublin, with Malvern serving as the “U.S. headquarters.” Its products include the Lidoderm shingles drug.

Because of the unusual way Endo structured the Paladin acquisition, a maneuver known as a “triangular reorganization,” it said in a December regulatory filing that it didn’t expect its executives and directors to face the 15 percent penalty. In case they did, Endo said, the company would pay their bills. The company’s board reasoned that it wouldn’t make sense to penalize the executives or directors for a transaction that was in the shareholders’ best interest, according to the filing.

At the time, Endo estimated the cost of the tax reimbursements for 10 executives and 9 directors would total about $31 million, including $7.8 million for de Silva. Endo called the costs “relatively insignificant” compared with the benefits of the deal.

Stock Gain

Last week, Endo said the excise tax would probably have to be paid after all. The main reason for the increase in the estimated cost is the gain in Endo’s share price since the prior estimate, Blaine Davis, an Endo spokesman, said in an e-mail yesterday.

Since the excise tax was created in 2004, most companies that faced it have taken steps to shield executives from the impact. Besides Endo, others that have picked up the tax bills for their CEO’s include Eaton Corp. in Cleveland and Perrigo Co. in Allegan, Michigan, both of which got Irish domiciles last year.

The total cost to companies that take this approach is often higher than the amount of the excise tax itself, because the payments themselves are subject to additional tax.

Some companies, such as Applied Materials Inc. of Santa Clara, California, opted to help their executives avoid the excise tax altogether by allowing their equity awards to vest ahead of schedule, before the inversion.

Pfizer CEO

If Pfizer succeeds in getting a U.K. address, through a takeover of AstraZeneca, its board may face a similar choice about how to deal with the excise tax on unvested equity.

Ian Read, the CEO for New York-based Pfizer, held $26 million of unvested stock awards as of Dec. 31, plus more than 4 million unvested option-like awards, according to a March regulatory filing. Those figures may overstate the amount potentially subject to the excise tax, because some of the awards have since vested, and others are set to vest early next year.

“It would be premature for us to speculate” on how the issue might be dealt with during an acquisition of AstraZeneca because “there is no firm offer or consummated deal,” said Joan Campion, a Pfizer spokeswoman, in an e-mail yesterday.