New Tax Inversion Rules Could Take all Juice Out of Pfizer-Allergan Merger

The new rules on corporate inversion set in place by the U.S. Treasury cast doubt on the $150 billion Pfizer-Allergan merger, which was supposed to help Pfizer escape the nation’s tax net.

After the new rules were announced, Allergan’s shares plunged 19 percent in after-hours. Analysts now believe that the new regulation could curb similar deals as tax-inversion-motivated agreements will be deprived from all benefits corporate inversion was supposed to bring.

Experts noted that the U.S. treasury addressed virtually every benefit and gain linked to such deals.

“They’re pretty much taking all of the juice out of inversions,”

said Robert Willens, a tax-inversion expert from New York.

This is the third time the federal government takes action against such mergers. To dodge U.S. taxes, U.S. companies often resorted to a merger with a smaller foreign firm, moved their headquarters overseas and their non-U.S. profits across countries with lower taxes to fend off the U.S. tax system.

The move usually brought hundreds of millions of dollars worth of savings in owed taxes. Firms specialized in such deals alone have made millions of dollars in fees over the last few years.

Lawyers were unimpressed by the previous two revamps on tax inversion rules, but they looked alarmed at the latest rules. Analysts and tax-inversion middlemen expected the new rules to be less aggressive.

Some deal makers even argued that the new legislation was specially tailored for the Pfizer-Allergan deal. One law firm described the new set of rules as an escalated ‘attack on inverted companies.’

The latest rules threaten all future tax inversions because it makes it harder for deal makers to invert an U.S. company, and if they do succeed the rules deprive the resulting companies from the much-sought savings.

But analysts believe that Treasury’s move could have unexpected effects on current mergers as well including the Pfizer-Allergan transaction. According to the new legislation, the U.S. government could penalize ‘serial inverters,’ i.e. companies that made a habit of tax inversion, by ignoring their assets acquired in the last three years.

Allergan could also targeted as a serial inverter since the company is the result of a long string of inversions that started with the 2013 deal with Actavis. Under the new rules, all Allergan deals will be stripped out to assess the company’s actual size under the U.S. tax law. If Allergan is found to be too small, it could no longer qualify for a merger with Pfizer under the federal rules, breaking their deal.

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