The pharmaceutical tie-up was created to allow New York-based Pfizer to move its corporate headquarters to Ireland, and possibly reduce its tax bill.
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This pressure was ramped up on Tuesday, when President Barack Obama praised the Treasury’s new rules and again urged Congress to take action to stop USA companies from doing inversion deals.
“Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies”, stated Ian Read, Chairman and Chief Executive Officer, Pfizer.
Companies, such as Pfizer, which terminated a proposed merger with Dublin-based Allergan this week, have tried to rush through deals before loopholes that permitted companies to go through with inversions were closed, Levin said.
“While we are disappointed that the Pfizer transaction will no longer move forward, Allergan is poised to deliver strong, sustainable growth”, Allergan CEO Brent Saunders said in a statement. The U.S. Treasury set up new rules that blocked the massive merger between Pfizer and Allergan. “Unlike other countries, the USA also requires its companies to pay taxes on income they earn anywhere in the world”. Currently, it is significantly cheaper for foreign-owned companies to invest in their USA research facilities than it is for Pfizer because they do not have to pay taxes on repatriated foreign earnings, he added.
Last November, when the Pfizer-Allergan deal was struck, the market caps of Pfizer and Allergan were about $200 billion and $120 billion, respectively, and Pfizer stockholders would own 56% of the merged company, according to the Journal. But the deal will proceed and still save hundreds of millions of dollars in taxes for investors because the Canadian tax rate is 28% versus 39.4% for the companies, he says. American drugmaker AbbVie abandoned its $55bn takeover of Ireland-domiciled peer Shire in 2014 after the Obama administration cracked down on inversions. The move comes one day after President Obama again criticized inversions, calling them “one of the most insidious tax loopholes out there”.
By merging under Ireland-based Allergan, Pfizer would have been able to escape United States taxes on $128 billion of profits stored overseas. The deal is expected to close by June. Allergan shares also rallied after having plunged about 15% Tuesday.
Sources told CNBC that while both companies believed the Treasury had overstepped the bounds of its regulatory authority with a crackdown on inversions, neither wanted to risk launching litigation against the U.S. government. It is based on the principle of non-recognition in the US Treasury calculations of acquisitions in the US by Allergan for less than three years.
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“There may be a temporary respite from inversions, but the large financial benefits… are still there”, said Bret Wells, a tax lawyer and law professor at the University of Houston. The rule is designed specifically to discourage “serial” inversions, where foreign companies combine with a number of US firms and then shift their tax addresses overseas.
