Pfizer has been a vocal opponent of US tax rates and in 2014 attempted unsuccessfully to merge with British drug maker AstraZeneca, citing tax policy as the reason.
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Meanwhile, researchers at the Institute of International Finance, a Washington-based association that represents close to 500 financial institutions from 70 countries, say the chances of a USA downturn within two years are at around 30 to 35 percent due to the earnings slump, up from 20 to 25 percent, Bloomberg reported.
“Treasury has taken action twice to make it harder for companies to invert”, Treasury Secretary Jacob J. Lew said in a statement.
Because Allergan itself is the product of multiple inversions that dragged USA corporate incomes out of the Internal Revenue Service’s reach, the administration’s new regulations against ” serial inverters” will force Pfizer back to the drawing board. “They’ve addressed literally every benefit that one attempted to gain from an inversion and shut them all down systematically”, said Robert Willens, a New York-based tax analyst.
Generally speaking, an inversion is a tactic used by a large companies that allows them to avoid paying corporate taxes by purchasing the stock of an overseas entity and re-incorporating in a more tax-favorable country. The rules would give the government more authority to treat those debt transactions as equity movements under the tax code.
“Big corporations are playing by a different set of rules”, he added.
President Barack Obama renewed his call for Congress to limit corporate tax inversions, one of the “most insidious tax loopholes out there”, a day after his own Treasury Department imposed its toughest curbs yet and endangered the largest-ever such deal. The companies said in a joint statement late Monday that they are reviewing the new Treasury rules and would not speculate on their potential impact. Allergan is based in Ireland, which has a 12.5 percent corporate tax rate. About 40 percent of inversions since that time have taken place over the last decade.
However, if the rule means that some of Allergan’s merger-driven growth since 2012 wasn’t allowable, the ownership ratio would swing more toward Pfizer in the treasury’s analysis and the planned transaction would be rendered less beneficial, for tax purposes.
Another rule proposed by the Treasury would target corporate “earnings stripping”, in which businesses accept loans from their foreign parent companies in order to pay fewer taxes on profits from the US. “Over a relatively short period of time, a significant portion of a foreign acquirer’s size may be attributable to the assets of these recently acquired American companies”.
During a briefing at the White House Tuesday, Obama said the best way to close the loophole is through tax reform – an act that requires the work of Congress, which is presently controlled by Republicans. So far, lawmakers have done little.
“We’re feeling some of the same macro factors to a lesser degree, but there’s a knockdown effect that if Europe is slowing down, that doesn’t necessarily bode well for us”, said Steven Baffico, chief executive at Four Wood Capital in NY.
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US Treasuries advanced, pushing yields three basis points lower to 1.73 percent.
