Pfizer-Allergan merger called off: Is the new US tax code working?

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.

First Look

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.