Why did Pfizer’s multi billion dollar deal go up in smoke?
The most expansive health care acquisition in history just came to a grinding halt as the Department of the Treasury and the Internal Revenue Service recently issued temporary and proposed regulations April 4, 2016, to limit the number corporate tax inversions and lower the resulting benefits from these deals. The effort to decrease the possibility of U.S. corporations keeping operations stateside but relocating their offices overseas for tax purposes has been praised as a major win for President Barack Obama and his administration's fight to curb such inversions.
"Treasury has taken action twice to make it harder for companies to invert," Treasury Secretary Jacob J. Lew stated. "These actions took away some of the economic benefits of inverting and helped slow the pace of these transactions, but we know companies will continue to seek new and creative ways to relocate their tax residence to avoid paying taxes here at home."
What deals do these newly proposed regulations affect?
Last November Pfizer, a global pharmaceutical corporation headquartered in New York City, announced a $160 billion merger with fellow global pharmaceutical company Allergan. As Allergan is based in Dublin, Ireland, the deal immediately drew major federal and industry criticism. Pfizer, as outlined in the terms of the deal, would be relocating its offices to Dublin, where the tax rate is significantly lower than the 35 percent rate in the U.S, according to Bloomberg.
By Reuters estimates, Pfizer could have saved around $1 billion each year on its taxes through relocating overseas. Pfizer officials previously stated that tax savings were not the only reasoning behind the multi billion dollar deal. Allergan would also significantly contribute to Pfizer's specialty drug unit.
"I want to stress that we are not doing this transaction simply as a tax transaction" Pfizer CEO Ian Read explained at the time the deal was initially announced. "We are doing this because of the strategic importance of the franchises, the revenue growth we believe we can get within the US and internationally, and the importance to combine the research approaches."
Despite this defiant assurance, Pfizer called off the monumental merger April 6, 2016, following the recent Treasury announcement. Under the newly proposed Treasury rules, Pfizer would be unable to benefit from overseas tax reductions, as the government may now crack down on certain cross-border mergers.
While corporations motivated purely by business strategies and economic reasons will still be able to relocate offices and benefit from lower taxes, corporations that are primarily driven by avoiding U.S. tax rates may not be able to do so.
Not all leaders are pleased with these regulations
While Lew urged "Congress to move forward with anti-inversion legislation this year," not all officials are pleased with these newly proposed regulations. Many business leaders, such as Steve Odland, CEO of the Committee of Economic Development, have come out against the Obama administration's push to mitigate corporation inversions. These leaders cite that current U.S. tax rates for corporations are far too high for organizations to not consider moving overseas.
"Most Americans and certainly businesses are very frustrated with the politicians here in Washington, targeting business leaders and calling them unpatriotic or un-American when they're simply following the rules and the laws placed," Odland told CNBC. "The issue here is that we have the highest statutory tax rates in the world."
Regardless of these officials, Allergan's shares fell 15 percent on the day before the deal, though sources say it still intends to move forward with its $40.5 billion sale of its generic drug business to Teva Pharmaceutical Industries. Meanwhile, Pfizer will reimburse Allergan $150 million for all accrued merger-related expenses, according to Reuters.