BY Richard Summerfield
After several years of bluster and two rounds of legislative measures, the Obama administration had, until very recently, failed wholly to put a stop to tax ‘inversions’. Indeed, the number of US companies inverting has been rising, with 2015 bearing witness to a record number of corporate inversions.
A typical inversion sees US companies acquiring an overseas rival, redomiciling to that company's country and adopting its lower-tax level. The practice has drawn the ire of both sides of the aisle in Washington and has been decried as one of the “most insidious tax loopholes out there” by President Obama.
However, this week the US Treasury finally announced a third tranche of measures which may actually curb inversion transactions. To that end, the new measures have already claimed a major scalp, causing the cancellation of the $160bn merger between US pharmaceutical manufacturer Pfizer Inc and Irish firm Allergan Plc.
“Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies,” said Ian Read, chairman and chief executive of Pfizer. “We remain focused on continuing to enhance the value of our innovative and established businesses. Our most recent product launches, including Prevnar 13 in Adults, Ibrance, Eliquis and Xeljanz, have been well-received in the market, and we believe our late stage pipeline has several attractive commercial opportunities with high potential across several therapeutic areas. We also maintain the financial strength and flexibility to pursue attractive business development and other shareholder friendly capital allocation opportunities.”
Pfizer would have stood to cut its tax bill by around $1bn annually by redomiciling in Ireland; however, now that the controversial merger has collapsed it will be required to pay Allergan $150m to reimburse the firm for expenses incurred during the transaction.
The Treasury hopes its measures tackle what it calls “serial inverters”, or foreign companies that have rapidly acquired multiple US companies. It will do this by limiting companies’ ability to participate in an inversion deal if they have taken part in one in the previous three years. Allergan, for the record, has been party to a number of inversion deals in that time period. The Treasury has also set out to reduce the tax advantages of inversions by curbing 'earnings stripping' — the use of intercompany loans to reduce US tax bills.
Now that the Allergan deal is dead in the water, Pfizer said 2016 will be a year of reflection. The company is contemplating spinning off its multitude of generic medicines into a separate businesses. Though the Allergan deal was due to delay that decision until 2019, the collapse of the merger will hasten Pfizer.
“We plan to make a decision about whether to pursue a potential separation of our innovative and established businesses by no later than the end of 2016, consistent with our original timeframe for the decision prior to the announcement of the potential Allergan transaction,” added Mr Read. “As always, we remain committed to enhancing shareholder value.”