Wedding is Off! Tougher Tax Inversion Laws Sees Pfizer Dump $160 Billion Allergan Deal at the Altar

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Reported by Annette Kreuger, Industrial Info Resources (Sugar Land, Texas)--Thanks to Uncle Sam in the form of the U.S. Treasury and more stringent tax inversion regulations, pharmaceutical giant Pfizer Incorporated's (NYSE:PFE) (New York, New York) much ballyhooed $160 billion merger agreement with Dublin, Ireland-based Allergan (NYSE:AGN) has been called off. On April 4, the agency issued new rules to curb tax inversions by U.S. companies, with even President Barack Obama weighing in, claiming the practice to be "one of the most insidious tax loopholes out there."

The simple explanation of a tax inversion is a company relocating its legal domicile to a lower-tax nation than its country of origin. The tax break is achieved by acquiring a company that is already headquartered in a "tax-friendly" country, and naming that site as the newly merged company's headquarters. When in fact, the "owner" typically continues to operate primarily from its original higher-tax location, with the "headquarter" office often existing as little more than a placeholder in the lower-tax nation.

In the case of Allergan and Pfizer, the math speaks for itself. The current tax rate for Irish Allergan is 14% as opposed to the 23.5% for Pfizer. Had the deal gone through as planned, Pfizer's tax bill would have reportedly been slashed by at least $1.2 billion, with some estimates placing it as high as $3.3 billion per year.

Click here to access the 2016 Pharmaceutical--Biotech Industry North American Outlook.

The new U.S. Treasury Department rules make it more difficult for U.S. companies to conduct tax inversions. The rules, which are over 300 pages in length, exclude the value of the foreign target's last three years of acquisitions when determining the tax benefits of such deals.

That threatened the Pfizer-Allergan accord because Allergan has completed three major deals in the last three years, including its $66 billion merger with Actavis and its $25 billion acquisition of Forest Laboratories.

Although some reports claimed a breakup fee of anywhere from $400 million to $3.5 billion, Pfizer has said it will pay Allergan $150 million.

Industrial info is tracking more than $1 billion in active projects by Pfizer and Allergan.

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