Companies will now have to re-work their tax strategies in order to optimize their U.S. tax profile.
In what has been described as a major victory for President’s Obama’s drive to curb tax dodging moves made by corporates, Pfizer Inc’s acquisition of Allergan Plc, has come to nought thanks to the new inversion rule.
The Pfizer-Allergan deal attempted in what would have been the biggest ever tax saving deal for the company as it would re-domicile to Ireland, where Allergan is registered. If the deal would have gone through the U.S. Treasury would have lost substantial amounts in taxes.
So as to plug this inversion loop hole, which many companies resort to, in order to save taxes, the U.S. Treasury created new rules which plug this loop hole in the law.
Although these new rules did not specify Pfizer and Allergan, a provision in the newly created rules targets a specific feature of their merger. The demise of the deal will allow Obama to claim a significant victory during his term in office.
Earlier this week, Obama had called on the Congress to take action against U.S. companies who were looking to avoid paying taxes by re-domiciling overseas. Obama has termed this as a “huge problem”.
“While the Treasury Department’s actions will make it more difficult… to exploit this particular corporate inversions loophole, only Congress can close it for good,” said Obama.
As per a source who is familiar with the matter at hand, Pfizer and Allergan is set to announce the termination of their deal sometime today. The source preferred to be anonymous as the breakup was yet to be formally announced.
Both, Pfizer and Allergan have declined to comment.
According to the terms of the merger, Pfizer will now have to pay Allergan up to $400 million for expenses as a termination fee.
With this information hitting the news circuits, Pfizers shares have edged up by 2%, in the hopes that the company would either re-negotiate the deal in its favour or walk away from it. On the other hand, shares of Allergan have slipped by 14.8% to their lowest levels since October 2014.
U.S. Presidential candidates, including, Hillary Clinton and Donald Trump have harped on this issues in their respective campaign trails.
“We have so many companies leaving, it is disgraceful,” said Trump as he greeted voters in Waukesha, Wisconsin on Tuesday. Clinton and Sanders both expressed support for Treasury’s plan.
Other mergers and acquisitions that could suffer the same fate include the $16.5 billion merger of Johnson Controls Inc. with Ireland-based Tyco International Plc, the $13 billion acquisition of IHS Inc. of London based Markit Ltd and the $2.67 billion acquisition of Waste Connections Inc.’s $ with Canada’s Progressive Waste Solutions Ltd.
Earning Stripping
The other significant change the U.S. Treasury brought about with the new rules is the limiting of a practice known as earnings stripping. It is typically undertaken, but not limited to, after an inversion.
The new rule restricts the related-party’s debt for U.S. subsidiaries in dealings that do not finance new investment in the United States.
This is not the first time U.S. inversion rules have gate crashed into a merger. In 2014, U.S. pharmaceutical AbbVie had to abandon its $55 billion takeover of Ireland-domiciled Shire Plc after the Obama administration cracked down on the inversion.
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