Pfizer and Allergan drop $330bn 'tax inversion' after Obama clampdown

Pharmaceutical firms Pfizer and Allergan have dropped plans for the biggest ever "tax inversion" that would have created a drugs giant with a combined value in excess of $330bn (£240bn).

A unanimous decision by the boards of both companies followed hot on the heels of a major policy announcement by Barack Obama's administration which aggressively clamps down on mergers designed exclusively to reduce US company's tax bills, targeting this tie-up in particular.

Under the terms of the $160bn deal, Ireland-based Allergan's purchase of Pfizer would have been bankrolled by the US company itself, mainly in the form of newly-issued shares. Pfizer's investors would have controlled 56 per cent of the combined entity.

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Existing rules allow for a company being acquired by an overseas buyer in this way to move its tax base out of the US if less than 60 per cent of the combined entity is owned by US investors. In this case, the merged business would have moved to Ireland, allowing Pfizer to reduce the tax it pays on billions of dollars of overseas revenues from 35 per cent to 12.5 per cent.

Under the new rules, the assumed size of the foreign acquirer for the purposes of the ownership test would disregard any previous tax inversions, The Financial Times says. As Allergan has been engorged since 2013 by a series of such deals, Pfizer shareholders would have been taking a notional stake of 80 per cent – busting the 60 per cent threshold and invalidating the tax benefits.

Reports suggested that Pfizer would have to pay a break fee of as much as $400m (£284m). In a statement, the company said it had agreed to pay $150m (£107m) to cover Allergan's expenses.

Wider effects

The New York Times adds that the new tax rules, which are outlined across "hundreds of pages" and based on "an expansive reading of the tax code", will have far wider effects. As many as six currently pending inversions could be affected, it claims.

Moreover, companies that have long since completed inversions, as well as overseas multinationals with a large US presence, may be hit by an attempt to counter so-called "earnings stripping", where US subsidiaries borrow money from overseas parents, with repayments being deducted from profit – and, therefore, the tax bill - without being "reflected on financial statements".

The new rules would "treat that debt as stock, effectively getting rid of the interest payments altogether", meaning "United States subsidiaries would be taxed on the full basis of their United States earnings".

Some tax lawyers have questioned whether the provisions of the tax legislation from which the new rules are drawn allow for such a radical overhaul. But the Times says "any legal challenge to the Treasury Department's new rules could potentially take years — with no guarantee of victory".

Allergan's shares slumped 15 per cent on Tuesday, while Pfizer's rose two per cent.

Pfizer's $160bn buyout ignites bitter tax row

24 November 2015

The boards of US drug giant Pfizer and Ireland-based Allergan have met to approve their $160bn (£106bn) merger – the healthcare sector's largest ever deal.

If it goes ahead, the transaction will technically be structured as Allergan buying the US company, although the money is coming from Pfizer in a complex arrangement referred to as an 'inversion'. Put simply, it will allow the maker of Viagra to move its tax base from the US, where corporate taxes are 35 per cent and it pays an effective rate of 26 per cent, to Ireland, where corporate tax rates are just 12.5 per cent.

The new company, which would retain most of its US presence but be officially headquartered in Ireland, would be the largest drugs company in the world, with a combined market capitalisation of around $330bn.

Talks were stepped up after the US Treasury announced plans to clamp down on such 'tax inversions'. Opposition to the deal continues, with Democratic presidential hopeful Hilary Clinton telling the Financial Times it "will leave US taxpayers holding the bag" and that she would soon propose "specific steps to prevent these kind of transactions".

That is easier said than done. Republications in a bitterly divided senate have said they are only likely to support restrictions if they are accompanied by changes to limit the tax burden on companies based in the US, for example by waiving charges on overseas revenues. This is not popular with Democrats, however, who are in no mood to offer tax breaks to multinationals.

Senator Bernie Sanders, Clinton's chief rival for the Democratic nomination, told Reuters the deal "would allow another major American corporation to hide its profits overseas".

"The fact that Pfizer is leaving our country with a tremendous loss of jobs is disgusting," Donald Trump, a Republican candidate for president, said in a statement to the New York Times. "Our politicians should be ashamed."

The company rejected the criticism.

"I cannot comprehend why it's not being applauded by the political class, or why anyone would want to frustrate this transaction," Ian Read, Pfizer's chief executive, said. "It's a great deal for the US, given that it frees up our ability to invest in American science."

Pfizer's $330bn mega-merger sparks tax debate

30 October

Dublin-domiciled Botox-maker Allergan has confirmed it is in "friendly talks" regarding a merger with larger US rival Pfizer, in a deal that would create a $330bn pharmaceuticals behemoth.

With discussions being welcomed, the tie-up is unlikely to provoke the sort of ire sparked when Pfizer launched its abortive $120bn buyout of British peer AstraZeneca last year. It is also unlikely to be seen in Ireland as a similar raid on a national asset: the Financial Times says Allergan is "still perceived as an American company despite its Irish domicile".

But this multinational identity, the core of the deal's rationale, could yet ignite a fierce debate over cross-border taxation. Allergan pays an effective tax rate of less than five per cent compared to Pfizer's 25 per cent. The deal would be carried out as a 'reverse takeover' and have the effect of shifting the combined company's tax base to Ireland.

Pfizer chief executive Ian Read has been brazen about the fact he is pursuing a strategy to reduce the company's tax bill. A number of his firm's close rivals in the sector have done that by executing similar 'tax inversion' acquisitions.

"To be successful in the future, we need to have a competitive tax rate. So that is why it's an important issue for us," Read was quoted as saying in an investor conference call on Tuesday.

The US government is part-way through reforms to try to close the option of using an international buyout to escape US taxes. Barack Obama once referred to such transactions as "unpatriotic". A spokesman for his Democratic heir apparent Hillary Clinton said in the wake of the Pfizer announcement she is "committed to cracking down" on inversions.

Reuters notes that under new rules the shareholders of the overseas company must own 40 per cent of the combined business. This means the Pfizer deal would need to be funded primarily through stock.

New OECD tax rules could make tax inversions decidedly less attractive. Firms would be required to show where in the world their revenues are being made, which would allow countries to update tax treaties and apply corporate taxes to revenues made in their jurisdictions.

But The Guardian notes the new rules are facing opposition in some quarters, including the US. The newspaper says key Republican-dominated Senate committee leaders have made clear their staunch opposition to the reforms, which they say are "attempting to basically grab a tax base of our [US] domestic corporations".