Proposed Megamerger Between Pfizer and Allergan

Pfizer and Allergan have announced that they’re considering a merger which could afford Pfizer a 10 percent tax break. Should the companies proceed with the merger, some have speculated that US-based Pfizer would relocate to Ireland – currently the home of Allergan – in order to take advantage of a lower tax rate.

The talks have reintroduced the topic of inversions – the relocation of an American company to a country with a lower tax rate – into the media spotlight. According to Reuters, Pfizer is currently taxed at 24%, while Allergan only pays 15% tax on their revenue.

Last year, the Obama administration outlined the steps the government planned to make in order to make it harder for companies to perform corporate inversions. The new rules were put in place by the White House in an attempt to keep the tax dollars coming in on US soil.

As numerous companies have already committed inversion for the tax benefits, some are wondering whether the Obama administration will step in to prevent the Pfizer-Allergan merger from happening. With the current political climate in the US and a new president expected to come into power next year, some are wondering whether the pharmaceutical companies will bide their time.

According to treasury secretary Jacob Lew, inversions are “an unfair loophole.” The new regulations regarding corporate relocation were released in September 2014, with the toughest rule being that a US-based company cannot own more than 80% or a foreign company that is acquired in a merger.

Along with other complicated calculations involving earnings of overseas subsidiaries, the new regulations are designed to make inversion much more difficult for corporations. Despite these tough regulations, industry insiders point out that the rule can be circumvented if the foreign company were to acquire the US-based firm.

In the case of proposed Pfizer-Allergan merger, Pfizer is the larger corporation so it’s unlikely that Allergan would mount a takeover. Big Pharma is no stranger to inversion but the Pfizer-Allergan merger would be the largest ever, if it’s allowed to proceed.

According to Representative Sandy Levin, who is the top Democrat on the House Ways and Means Committee, “As companies continue to contemplate possible tax inversions, it is our responsibility to act to address this loophole once and for all.” The proposed merger would cost the US economy hundreds of billions of dollars as well as thousands of jobs, according to investor Carl Icahn.

Sources:

• Can the White House stop a Pfizer-Allergan inversion megamerger? – http://www.biopharmadive.com/news/can-the-white-house-stop-a-pfizer-allergan-inversion-megamerger/408337/
• Lew Outlines Rules to Discourage Inversions – http://www.usnews.com/news/articles/2014/09/23/lew-outlines-rules-to-discourage-inversions
• Pfizer deal may trigger biggest tax hit from inversion – http://www.marketwatch.com/story/pfizer-deal-may-trigger-biggest-tax-hit-from-inversion-2015-10-29
• Carl Icahn calls Pfizer’s plan to leave the U.S. to save on taxes ‘dangerous’ – http://www.marketwatch.com/story/carl-icahn-calls-pfizers-plan-to-leave-the-us-to-save-on-taxes-dangerous-2015-10-29