Zoetis ($ZTS) has been working hard this past year to turn things around, implementing a major plan to cut costs in order to boost business. But now the company is facing a setback in the new year after the European Commission ruled that a Belgian tax scheme used by multinationals such as Zoetis is illegal.
The Florham Park, NJ-based company is expecting to record a one-time net tax charge in Q1 2016 of about $35 million to $45 million as a result of the ruling, Zoetis said in a statement. The EU this week said that a Belgian "excess profit" tax scheme ran afoul of the law by giving tax reductions of about €700 million to at least 35 multinational companies.
Belgian law requires companies to pay taxes that they record in the country. But Belgium gave "special treatment" to some multinationals by saying that the companies collected "excess profit" that a hypothetical stand-alone company in a similar situation would not have made, the EU Commission said in a statement. As a result, some companies did not pay taxes on more than 50% of their actual profits. And in some cases, multinationals did not pay on up to 90% of their profits.
Unsurprisingly, Zoetis is not pleased with the EU's decision. The company said that it "disagrees" with and "plans to appeal" the ruling. Zoetis "complies with all tax laws" and "has relied on these long-standing agreements in Belgium for its financial plans and business operations, including supply chain, manufacturing, R&D and international sales organizations," the company said in a statement.
But if the appeal doesn't go through, that could spell out more trouble for Zoetis in the years ahead. The company, which recently projected sales growth through 2017, is estimating its effective tax rate on adjusted income to jump to 33% from 28% in 2016. And Zoetis plans to adjust its tax rate to 30% in 2017 to "reflect the benefit of certain actions that could mitigate this impact on future results," the company said.
In the meantime, Zoetis is forging ahead with its cost-cutting plan after facing pressure from activist hedge fund investor Bill Ackman to clean up shop. The company's strategies include exiting 10 manufacturing facilities, eliminating 2,500 jobs and 5,000 underperforming SKUs.
And Zoetis isn't wasting any time getting the ball rolling in the new year, selling off a plant to Indian drugmaker Zydus Cadila last week for $29 million. If all goes according to plan, the company's restructuring efforts, dubbed "Zoetis Next," could save the company $300 million a year, Zoetis CFO Paul Herendeen recently told the WSJ.
Zoetis was down 1.21% to $44 in early morning trading upon news of the Belgian tax ruling.
- here's Zoetis' statement
- read the EU Commission's release
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