Subscribe
First Look

Pfizer-Allergan merger called off: Is the new US tax code working? (+video)

New Treasury Department rules to increase the tax accountability of companies with branches abroad have succeeded in pushing Pfizer and Allergan to call off a huge overseas merger.

  • close
    Traders work on the floor of the New York Stock Exchange in this November 2015 file photo. Allergan and Pfizer called off a record $160 billion merger on Wednesday after the US Treasury issued new rules to make "tax inversions" less lucrative.
    Richard Drew/AP/File
    View Caption
  • About video ads
    View Caption
of

A halted $160 billion merger between Pfizer Inc. and its Irish rival Allergan PLC not only prevents the United States' largest drug company from increasing in size, but also suggests a new tax law has finally succeeded in stopping mergers designed to reduce tax rates. 

The US government has refined tax codes in recent years to stop "tax inversion," when large US companies use acquisition as a strategy to reduce their taxes by merging with a smaller company overseas and transferring official headquarters to more tax-friendly shores. The Pfizer-Allergan deal would have been the largest tax inversion merger in history, and stopping it represents a victory for the Obama administration's campaign against such moves, The Washington Post reported.

Congress and the US Department of the Treasury have made numerous changes to discourage inversions, releasing a new set of regulations on Monday. The challenge is specific enough to avoid implicating innocent American workers abroad but detailed enough to catch those who willfully try and evade payments, as The Christian Science Monitor's Olivia Lowenberg reported:

Some of the new rules will make it more difficult for companies to invert and reduce their opportunities to "strip" their earnings. Like teenagers, companies looking to reduce their tax burden will sometimes issue tax debt to their foreign parents, a strategy known as "earnings stripping." Additionally, Mr. Obama said Tuesday, the regulations will help prevent foreign companies, or so-called "serial inverters," from completing several such deals in a short period of time.

Monday's announcement represents the Treasury Department's third attempt to rein in such activity, and its first clear sign of success.

"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," John Colley, a business school professor at the University of Warrick in Conventry, England, told The Christian Science Monitor after Monday's announcement.

Allergan's chief executive officer Brent Saunders expressed disappointment over the halting of the $160 billion merger Wednesday. Pfizer executives said the companies called off the merger "by mutual agreement" and cited Monday's announcement of new regulations from the US Treasury as the reason. Pfizer is paying Allergan $150 million for expenses.

Companies that try and move their headquarters overseas say they do so to avoid a punishing corporate tax rate of 35 percent, Reuters reported. The US corporate tax rate is among the highest in the world, while Ireland's is 12.5 percent.

This report contains material from the Associated Press.

About these ads
Sponsored Content by LockerDome
 
 
Make a Difference
Inspired? Here are some ways to make a difference on this issue.
FREE Newsletters
Get the Monitor stories you care about delivered to your inbox.
 

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK