Pharmaceutical and other U.S.-based companies have used so-called “tax inversions” as a tool for mergers. But on Monday, the U.S. Treasury Department unveiled new rules designed to crack down on these tax-cutting deals. And Pfizer, which has operations in North Carolina, stands to be among the losers, says a Warwick Business School professor as well as a former corporate managing director.
In fact, early Wednesday, Allergan and Pfizer called off a record $160 billion merger.
The merger would have moved Pfizer’s address — but not its operations or headquarters — to Ireland where it would pay far less in corporate taxes.
Pfizer has agreed to pay Allergan $150 million for reimbursement of expenses.
Raleigh-based Salix Pharmaceuticals also attempted an inversion before being sold Canada-based Valeant last year.
John Colley, of Warwick Business School, is a Professor of Practice in the Strategy and International Business Group who researches large mergers and also a former managing director of a FTSE 100 company, said the U.S. rule change “wiped out” a $20 billion benefit for Pfizer.
“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,” he said Tuesday.
“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.
“The stock market thinks that the US government is likely to be successful with this move. Several pharmaceutical deals are based on similar tax benefits. Indeed this move may well prevent recent tax inversion deals altogether. If so, US businesses will have to rely on more conventional benefits to justify their overseas merger plans. Pfizer may terminate the deal or alternatively renegotiate a lower price. Certainly their shareholders will not now be happy with the terms of the original deal.”
In its report, the Associated Press noted, that the new rules are aimed at making tax inversions — when U.S. companies move abroad for lower tax rates — less financially appealing.
The new regulations, the third round that Treasury has put forward on inversions, seek to limit internal corporate borrowing that shifts profits out of the United States.
Tax inversions have sparked a political outcry. Last November, Pfizer and Allergan announced a $160 billion deal that could save New York-based Pfizer hundreds of millions of dollars in U.S. taxes annually by moving its headquarters for tax purposes to Ireland, where Allergan is based.
Late Monday, Pfizer and Allergan issued a joint statement saying that they are reviewing the new Treasury rules and would not speculate on their potential impact. Investors, however, appeared to think the rules could undermine the two companies’ deal, and sent Allergan’s shares down nearly 22 percent in after-hours trading. Pfizer’s shares rose about 2 percent.
Treasury Secretary Jacob Lew said Treasury’s new rules are designed to make inversions less economically beneficial for companies. But he again called on Congress to act to halt the practice.
“Only new anti-inversion legislation can stop these transactions,” Lew said on a conference call with reporters. “Until that time, creative accountants and lawyers will continue to seek new ways for companies to move their tax residences overseas and avoid paying taxes here at home.”
Lew said the new Treasury proposals would also take aim at foreign companies that acquire multiple U.S. firms over a short period of time. Lew said these transactions were being done by what he called “serial inverters” in an effort to keep slashing their U.S. tax liabilities.
