That’s easier said than done, given Pfizer’s huge scale, increasing pressure from insurers for bigger discounts and a revenue base that’s been declining over the last several years as multiple blockbusters such as cholesterol drug Lipitor have lost billions in annual sales to much-cheaper generic copycats.
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Previous changes to the inversion rules have sunk deals in the past. In a joint statement, the two companies said they were reviewing the Treasury Department’s latest actions.
Others, however, believe that if the new rules are not ultimately watered down, worldwide tax planners – as is their wont – will find ways amid a myriad of tax regimes globally to get around the limitations. They sent Allergan shares down by 15% during Monday trading. Pfizer’s stock rose 84 cents to $31.56 a share.
With Pfizer’s planned inversion looking like the start of a dreaded trend, tax inversions became a hot issue in the presidential race, with some candidates calling companies considering such deals “unpatriotic”.
Tax inversion is the process wherein a local company which wants to avoid high tax rates in its country of origin would be able to cut its taxes if it transfers its official address to another country which imposes lower tax rates.
Although the rules didn’t specifically name the two companies, one of the new provisions that’s mentioned in them is having a history of being a big acquirer of other companies, which Allergan does.
Obama called on the Republican-controlled Congress to permanently ban corporate inversions. The Obama administration said Tuesday it’s imposing new regulations to keep companies from moving their headquarters – and their profits – overseas. The new Treasury rules ban such tax deductions if the loans are not used to fund new investment the US. However, the Treasury turned its focus to inversions in September 2014. In general, Fitch views the tax advantages resulting from a move overseas as beneficial to a company’s liquidity and credit profile. Washington announced at the beginning of the week that would introduce new measures to stop serial inverters and to block the practice of “earnings stripping” under which companies lower their taxable United States profits by using a foreign parent company to give its American subsidiary a loan, the interest payments of which can be deducted from the USA taxable income.
Shire said in a statement it expects to complete the deal by mid-2016.
“Allergan will have to deploy that capital in some way”, Mahony said. Is corporate domicile determined by where the company is legally incorporated, where most of the employees are located, or where principal research or operations take place, he asked. “This is a very easy pivot for us”, he said.
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In walking away, Pfizer said it would pay Allergan, the maker of Botox and other drugs, $150 million as reimbursement of expenses associated with the transaction.
