Pfizer-Allergan Merger Redo Seen Unlikely as Tax Rule Rejected

Oct. 2, 2017, 10:41 PM

By Lynnley Browning, Bloomberg News

A federal judge last week overturned a tax regulation that stopped the planned $160 billion merger between Pfizer Inc. and Ireland-based Allergan Plc last year-- but the ruling doesn’t necessarily mean the deal would be revived, experts said.

The proposed merger drew nationwide outcry over the prospect that it would move the new company’s tax address overseas in a so-called corporate inversion. The merged company’s tax address would have been in Ireland, where the corporate rate is 12.5 percent. But now, with Congress and President Donald Trump working on a rewrite of the U.S. tax code, the laws governing such transactions are subject to change.

For that reason, “the urgency to revive deal talks might not be there,” said Robert Willens, an independent tax and accounting expert in New York. Still, the regulation had been “the only thing standing in the way” of the Pfizer-Allergan deal, Willens said.

A Pfizer spokeswoman didn’t immediately respond to a request for comment.

The Obama administration made headlines in April 2016 when it released fresh rules aimed at preventing inversions that seemed squarely aimed at the Pfizer-Allergan deal. One rule would have been aimed at curbing “serial” inverters -- offshore companies that grow through repeated acquisitions of U.S. firms, helping them meet minimum standards for offshore ownership in subsequent transactions.

Proper Procedure

Under those 2016 rules, U.S. officials would have discounted some of Allergan’s previous growth -- meaning that a merged Pfizer and Allergan would still be subject to U.S. tax rules, regardless of the firms’ plan to site the new headquarters in Ireland. Allergan is based in Dublin for tax purposes, but run from New Jersey.

The Texas Business Association and the U.S. Chamber of Commerce sued to challenge the rules, and on Sept. 29, District Judge Lea Yeakel ruled that federal officials didn’t follow the proper procedure of public notice and comment in promulgating the regulation.

A Treasury Department spokeswoman didn’t respond to a request for comment on how the agency will react to Yeakel’s ruling. The decision comes as Trump and Congress are proposing a major change in the way the U.S. taxes multinational corporations.

In a nine-page framework for tax legislation that Trump and Congress released last week, they proposed to cut the corporate tax rate to 20 percent and end the worldwide approach to focus on taxing corporations’ U.S. income.

The current corporate tax rate, 35 percent, applies to U.S. companies’ worldwide profits, no matter where they’re earned -- a global approach that makes America unique among developed economies. However, companies can defer paying U.S. tax on offshore earnings until they return that income to the U.S. As a result, American companies have stockpiled an estimated $2.6 trillion in earnings offshore.

‘Cool Ardor’

The Republican framework for tax legislation suggests cutting the taxes due on those stockpiled profits to encourage their return to the U.S. Going forward, it suggests another tax, also at a lower rate, that’s designed to prevent companies from shifting profits into countries that operate as tax havens.

But the framework didn’t specify those lower tax rates -- leaving such decisions up to Congress’s tax-writing committees.

No matter what Congress does, Andy Grewal, a law professor at the University of Iowa, said he thought inversions -- in which U.S. companies combine with offshore firms in transactions that move their tax addresses to lower-tax countries -- would “still be attractive” in part because a minimum tax would fall below the proposed 20 percent corporate rate.

For now, it remains a matter for speculation.

Dropping the worldwide approach might “cool ardor for inversions,” said Phil West, the chair of the tax practice at Steptoe & Johnson LLP. And if the minimum foreign tax rate is set correctly, “the combination can be a significant disincentive to inversions, taking into account transaction costs.”

--With assistance from Cynthia Koons.

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