Pfizer has killed what was expected to be a historically large $160 billion merger with Ireland-based drug company Allergan in the wake of the Department of Treasury releasing more-aggressive-than-expected regulations Monday in an attempt to prevent companies from fleeing abroad to seek tax relief.
By moving the company abroad on paper, the New York-based pharmaceutical giant would have been able to significantly lower its tax burden. Ireland’s corporate tax rate stands at 12.5 percent, while the United States has one of the highest rates in the western world, with the top marginal corporate tax rate standing at around 39 percent.
The new rules, which affect inversions that took place over the course of the past three years, “prevent a foreign company (including a recent inverter) that acquires multiple American companies in stock-based transactions from using the resulting increase in size to avoid the current inversion thresholds for a subsequent U.S. acquisition.” The regulations also make it more difficult for corporations to lighten tax burdens through internal loans through deductible interest payments.
“Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies,” Pfizer Chairman and CEO Ian Read said in a statement. “We remain focused on continuing to enhance the value of our innovative and established businesses.”
Pfizer said it will pay Allergan $150 million to reimburse the company for the expenses it took on related to the merger.
“We plan to make a decision about whether to pursue a potential separation of our innovative and established businesses by no later than the end of 2016, consistent with our original timeframe for the decision prior to the announcement of the potential Allergan transaction,” Read continued. “As always, we remain committed to enhancing shareholder value.”
Allergan said it doesn’t believe its tax rate will be affected by the recent changes.
“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,” CEO and President Brent Saunders said in a statement.
President Barack Obama praised the new rules during a press conference Tuesday, saying he believes laws on the inversions were poorly designed and the transactions should have been outlawed.
Republican lawmakers said the regulations are not addressing the root of the problem, the country’s broken tax code, which is driving businesses out of the country.
“Such proposals paired with a business tax reform framework that lacks substantive details on how to achieve bipartisan reform goals put into question its effectiveness in fully addressing the problem,” Senate Finance Committee Chairman Orrin Hatch said in a statement. “A better approach would be for the administration to work with Congress in good faith to address the disease-causing our companies to move offshore: our outdated tax code that burdens our job creators with the highest corporate tax rate in the developed world.”
A conservative coalition consisting of 13 pro-free market organizations, including Americans for Tax Reform, the National Taxpayers Union and FreedomWorks, wrote a letter to Treasury Secretary Jack Lew slamming the rules, saying they make it even more difficult for American companies to conduct business overseas.
“Some have criticized Pfizer’s recent inversion move by arguing the company owes $35 billion in taxes, but this is income that the company only has to pay because the archaic U.S. tax code subjects business to double taxation on profits earned overseas,” they wrote. “This double taxation does not exist for companies headquartered in any of the 28 of 34 OECD countries with tax systems that exempt between 95 to 100 percent of foreign source income, including Canada, France, Germany, Japan, and the U.K.”
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