Pfizer and Allergan have confirmed that they have mutually agreed to terminate their proposed $160 billion combination deal.

In a statement Pfizer said that the decision was driven by new rules from the US government that seek to curb ‘tax inversion’ deals, where firms merge under a foreign company to move their tax base outside the US.

By merging under Ireland-based Allergan, Pfizer would have been able to escape US taxes on $128 billion of profits stored overseas. However the US government is limiting the benefits of ‘serial inverters’, companies that have acquired multiple US firms over a short period of time. This affects Allergan, which has been enlarged by a series of deals culminating in a takeover of US-based Actavis last year. 

“Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies,” said Ian Read, Chairman and CEO of Pfizer. “We remain focused on continuing to enhance the value of our innovative and established businesses.”

Pfizer has agreed to pay Allergan $150 million for reimbursement of expenses associated with the transaction, even though the original agreement said that the break-up fee could be up to $400 million.

In a separate statement, Allergan CEO Brent Saunders, said: “While we are disappointed that the Pfizer transaction will no longer move forward, Allergan is poised to deliver strong, sustainable growth built on a set of powerful attributes.”

Later, speaking to CNBC news, Saunders said that the US has targeted the deal in their new rules: “It really looked like they did a very fine job of constructing a rule here — a temporary rule — to stop this deal, and obviously it was successful.

"For the rules to be changed after the game has started to be played is a bit un-American, but that's the situation we're in," he added.

"We built this deal around the law, the regulations, all the notices that were put out by the Treasury and it was a highly legal construct. We followed the rules that Congress had set for companies looking to move to foreign domicile.”

The deal between Pfizer and Allergan would have been the largest in the history of the industry, and would have created the world’s largest pharma company, with a market capitalisation in excess of $300 billion.