US tax inversion move may scuttle Pfizer's plan to become Irish
The US Treasury Department on Monday made its third attempt in recent years to curb US companies from moving their headquarters/ tax domicile to foreign countries to save tax. The move may scuttle the $160 billion deal between Pfizer Inc., the US drugs giant, and the already Irish, Allergan PLC, which makes Botox among other remedies, and is run from the United States but board meetings are held in Dublin.
Allergan shares plunged 22% in after-market trading Monday, while shares of Pfizer rose 3%.
Jack Lew, Treasury secretary said:
Today, we are taking further action to make it more difficult to invert. Some companies are serial inverters. They acquire multiple U.S. firms in stock-based transactions over a short period of time. This increases their size and reduces the negative tax consequences of a subsequent inversion. Today’s action takes away a significant amount of the tax benefits of these serial inversions. We are also taking action to curb the use of earnings-stripping by focusing on transactions that generate large interest deductions by simply transferring debt between subsidiaries without financing new investment in the United States. Finally, we are issuing formal regulations implementing our previous two inversion actions – these simply carry out the original intent of the notices.
We will continue to explore additional ways to limit inversions. But only new anti-inversion legislation can stop these transactions. 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. We urge Congress to take action, and we believe the best way would be to enact comprehensive business tax reform with specific anti-inversion provisions.
Allergan, which employs over 1,000 in Co. Mayo, was acquired by Actavis in 2015 in a $66bn deal.
Actavis of New Jersey became Irish in 2013 when it acquired Warner Chilcott PLC, an Irish firm. In 2014, Actavis purchased Forest Laboratories Inc. in 2014 in a $25bn deal.
Actavis changed its name to Allergan last summer.
Pfizer, had a closing market capitalisation of $193bn at Monday's closing.
The Wall Street Journal says that stripping those deals out of Allergan’s closing market capitalisation of $106 billion could make it too small to serve as Pfizer’s inversion partner under federal rules that disfavour lopsided mergers, or limit the financial benefits of the arrangement.
“It’s going to be a major impediment. They’re pretty much taking all of the juice out of inversions,” Robert Willens, a New York-based tax analyst, told the Journal. “They’ve addressed literally every benefit that one attempted to gain from an inversion and shut them all down systematically.”
To gain tax benefits, taking advantage of the lower Irish rate, the newspaper says that the US company’s shareholders should own between 50% and 60% of the merged entity, which requires a partner of carefully calibrated size. Above that, some restrictions apply, including rules making it harder for companies to access foreign profits. The Pfizer-Allergan deal is structured so that Pfizer’s shareholders will own 56% of the company.
Willens said the new percentage in the Pfizer-Allergan deal would be at least 60% and could approach 80%, above which all benefits of the inversion are lost.
The merger termination fee would be $400m.
Umer Raffat, Evercore analyst, wrote in a note:
The real issue is not so much what Allergan may prove or disprove, or whether Treasury overstepped its authority. The real question is whether Pfizer reads today's regulations as reason enough to not continue to pursue the deal
Jack Lew added in his remarks Monday:
After an inversion, many of these companies continue to take advantage of the benefits of being based in the United States – including our rule of law, skilled workforce, infrastructure, and research, and development capabilities — all while shifting a greater tax burden to other businesses and American families.
Pfizer employs about 4,000 people in Ireland but apart from professional fees, the main impact of Pfizer becoming Irish would be further distortion of the national accounts.
Gross national income (GNI)/ gross national product (GNP) together with the current account (Balance of Payments) are artificially boosted.
Jacob J. Lew, US Treasury secretary, chats with 'Hamilton' musical creator and star Lin-Manuel Miranda, 30 March, 2016
in front of a portrait of Alexander Hamilton, first Treasury secretary, who died in a duel with Aaron Burr, vice president, in 1804.
Source: Financial Times