New Tax Inversion Regulations Doom Pfizer-Allergen Deal

New tax inversion regulations introduced by the U.S. Treasury on April 4 thwarted a proposed $160 billion merger between Pfizer and Allergen. Both corporations mutually agreed to walk away from the merger, which was announced in October 2015. Pfizer will reportedly pay Allergen a break-up fee upwards of $150 million.

What about the Treasury’s new regulations prevented a deal that would have created the world's largest drug maker?

The Treasury’s regulations—the third in a series of changes—imposed a 3-year limit on foreign companies amassing U.S. assets to avoid ownership limits for a subsequent inversion deal. This is designed to curtail serial inversions by companies, which made it more difficult and less profitable for these 2 parties. 

The new regulations would curtail another tax-reduction strategy known as earnings stripping. This involves a U.S. subsidiary borrowing from its overseas parent company. The U.S. subsidiary then deducts interest payments from its earnings. Going forward, the U.S. will treat this debt as stock, eliminating the interest payments and taxing the American subsidiary on the full amount of its earnings here. The new inversion regulations are just one of the measures the U.S. is taking to prevent tax-base erosion. 

Allergen, famous for Botox and Restasis, has its headquarters listed as Ireland. By changing its domicile from the U.S. to Ireland, it is estimated Pfizer could have cut its corporate tax rate from 24% to 17% and it would have gained access to billions of dollars it was keeping overseas to avoid U.S. taxation. 

This was the second recent attempt by Pfizer to shift its tax domicile overseas. It had previously tried to acquire AstraZeneca, which is based in Great Britain. That attempt, however, was unsuccessful. Stay tuned for more updates from EisnerAmper on tax inversions.