The US Department of Treasury has unveiled new measures to curb so-called tax inversion deals, which may affect Pfizer’s plans for its $160-billion merger with Allergan.
Tax inversion deals - under which companies move their tax residences overseas to more beneficial tax environments without making significant changes to their business operations - divert large streams of money away from government coffers and have thus become increasingly unpopular with US officials.
According to Treasury Secretary Jacob J. Lew, many of companies continue to take advantage of the benefits of being based in the US - including a skilled workforce, infrastructure, and R&D capabilities - while “shifting a greater tax burden to other businesses and American families”.
US officials have already taken action to decrease the attractiveness of such deals, and have now gone a step further by removing a significant amount of the tax benefits from ‘serial’ inversions, i.e when firms acquire multiple US firms in stock-based transactions over a short period of time.
Lew noted that the Treasury is also taking action to curb the use of earnings-stripping, by focusing on transactions that generate large interest deductions by simply transferring debt between subsidiaries without financing new investment in the US, and will explore additional ways to limit tax inversions deals.
It is possible that both these new measures could throw a spanner into the works of the mega $160-billion merger of Pfizer and Allergan, under which the companies are planning to combine under Allergan, which will then be renamed Pfizer, to create the world’s leading drugmaker by sales with headquarters in Ireland instead of the US.
In a statement, the companies said: “We are conducting a review of the US Department of Treasury’s actions announced today. Prior to completing the review, we won’t speculate on any potential impact.” Nevertheless, Allergan’s share price dropped more than 20% after the Treasury announced its plans, reflecting investor uncertainty over the development.
"The move to limit tax inversions by the US government has wiped $20 billion off the share price of Allergan which broadly equates to the tax benefit arising from Pfizer merging with Allergan. In effect this ruling is casting doubt on the proposed merger which appeared to be based more on the $21 billion tax benefits of a Dublin head office than any other mutual benefits,” said Professor John Colley, of Warwick Business School.
"Other than the tax benefits it was never clear what other benefits really existed in the deal. Pfizer does need growth prospects and Allergan did offer some better prospects than Pfizer as Pfizer is struggling for significant new drugs and has large cash piles which cannot be repatriated to the US and shareholders for tax reasons”.
“It’s going to be a major impediment. They’re pretty much taking all of the juice out of inversions,” said Robert Willens, a New York-based tax analyst, reports the Wall Street Journal. “They’ve addressed literally every benefit that one attempted to gain from an inversion and shut them all down systematically.”