Pfizer-Allergan merger dead after tax rule change makes inversion harder

The $160 billion merger agreement between Pfizer Inc. and Dublin-based Allergan plc has been called off by the companies’ mutual agreement. Pfizer cited a notice by the U.S. Department of Treasury on April 4, 2016, that will curb tax-avoiding corporate “inversion,” which the companies concluded qualified as an “adverse tax law change” under the agreement.

Companies undertake an inversion transaction when they move their tax residence overseas to avoid U.S. taxes without making significant changes in their business operations, according to the Department of the Treasury. After an inversion, the companies often continue to take advantage of the benefits of being based in America, while shifting a greater tax burden to both other business and taxpayers in the U.S. The Department of the Treasury aims to limit inversions by disregarding foreign parent stock attributable to recent inversions or acquisitions of U.S. companies, preventing foreign companies acquiring American companies in stock-based transactions form using the increase in size to avoid current inversion thresholds for any subsequent U.S. acquisitions.

Treasury rules previously required that an inverted company, such as the proposed Pfizer plc, be a tax-resident in its new home country under the country’s rules, not just U.S. law, to pass the test of whether it has 25 percent of its business activity in the new country. A company can be recognized as a foreign-based company by passing the 24 percent threshold. Before the Department’s announcement, the Treasury rules alone were not likely to stop the merger because Pfizer stockholders would have held a majority of the combined company, with 56 compared to the 44 percent held by Allergan’s shareholders (see Big pharma gets bigger: Pfizer and Allergan in $160B deal, Health Law Daily, November 23, 2015).