Under the new rules, stock that Allergan has issued within the past three years to acquire U.S. companies wouldn’t be included in the calculations. Applying that rule, Americans for Tax Fairness estimates that Pfizer shareholders might own about 70 percent of the new foreign company, well above the 60 percent rule, said Frank Clemente, executive director of the advocacy group.
This piece appeared in the Washington Post.
President Obama made a forceful case Tuesday for stopping corporations from moving their headquarters overseas to avoid U.S. taxes, saying they are taking advantage of the American economic system and saddling the middle class with the bill.
These companies “effectively renounce their citizenship,” Obama said at a White House news briefing. “They declare that they’re based somewhere else, thereby getting all the rewards of being an American company without fulfilling the responsibilities to pay their taxes the way everyone else is supposed to pay them.”
Obama praised regulations issued Monday by the Treasury Department aimed at making these inversions — in which U.S. companies combine with foreign firms to reduce U.S. taxes — more difficult.
Inversions are one of the most “insidious tax loopholes out there . . . [and make] it harder to invest in the things that are going to keep America’s economy going strong for future generations,” Obama said. “It sticks the rest of us with the tab. And it makes hardworking Americans feel like the deck is stacked against them.”
Tax avoidance is a “big, global problem,” Obama added, pointing to an enormous leak of documents from a Panamanian law firm that allegedly detail the offshore shell companies and tax shelters used by rich leaders around the world.
“It’s not that they’re breaking the laws, it’s that the laws are so poorly designed that they allow people, if they’ve got enough lawyers and enough accountants, to wiggle out of responsibilities that ordinary citizens are having to abide by,” Obama said.
“Here in the United States, there are loopholes that only wealthy individuals and powerful corporations have access to. . . . A lot of these loopholes come at the expense of middle-class families, because that lost revenue has to be made up somewhere.”
The new Treasury Department rules are the Obama administration’s third, and most aggressive, attempt to stem the tide of inversions. They could imperil Pfizer’s $160 billion deal to join Botox-maker Allergan and move its headquarters to Ireland in order to lower its tax bill, according to several corporate tax experts. CNBC and the Wall Street Journal, citing people familiar with the matter, reported late Tuesday that Pfizer and Allergan were preparing to announce that they would abandon their merger in the face of the new regulations. A Pfizer spokeswoman declined to comment on those reports.
The deal, the largest proposed inversion in history, was expected to lower Pfizer’s tax rate and save the pharmaceutical giant about $35 billion in taxes. But the rules announced Monday could make those savings more difficult to achieve.
“We await formal comments from the companies, but at this point we believe it is unlikely the deal will close,” Credit Suisse analyst Vamil Divan wrote in a research note sent out Tuesday morning.
Pfizer, asked to respond to Obama’s remarks, reiterated its joint statement with Allergan released Monday evening: “We are conducting a review of the U.S. Department of Treasury’s actions announced today. Prior to completing the review, we won’t speculate on any potential impact.”
Currently, to take advantage of an inversion’s tax savings, the shareholders of the U.S. company must own less than 60 percent of the combined company. Pfizer’s shareholders would own 56 percent of the combined corporation, for example. That is in part because Allergan has completed previous acquisitions of U.S. companies that have increased its size. Last year, for instance, Dublin-based Actavis completed its deal to buy Allergan for $70.5 billion, and the combined company took on Allergan’s name.
Actavis itself was a product of several deals that effectively relocated corporate headquarters: It bought New York-based Forest Laboratories for $28 billion in 2014. And in 2013, then-New Jersey-based Actavis bought Warner Chilcott in a deal valued at $8.5 billion, relocating its global headquarters to Ireland and gaining a lower tax rate.
Under the new rules, stock that Allergan has issued within the past three years to acquire U.S. companies wouldn’t be included in the calculations.
Applying the new Treasury Department rules, Americans for Tax Fairness estimates that Pfizer shareholders could own about 70 percent of the new foreign company, well above the 60 percent threshold, said Frank Clemente, executive director of the advocacy group.
“It appears that the Treasury Department has issued a rule with respect to serial inverters, such as Allergan, that will wipe out the expected tax breaks Pfizer was counting on,” Clemente said.
Pfizer’s stock was up about 1 percent Tuesday, but Allergan’s shares fell more than 15 percent.
Depending on the way the calculations are done, Pfizer shareholders’ ownership in the new company could even approach 80 percent, said Robert Willens, an independent tax expert. That would trigger even more stringent Treasury Department rules that would make it harder still for the company to lower its tax bill. “If the ownership fraction equals or exceeds 80 percent, the deal will certainly be tabled,” Willens said.
Several tax experts questioned whether the Treasury Department’s new regulations would withstand a legal challenge. But, they said, Pfizer may not want to wage a multi-year legal battle.
“We are surprised, to say the least, that Treasury took the drastic step of proposing such a punitive rule, apparently without the authority to do so,” Willens said.
Umer Raffat, an analyst at Evercore ISI, wrote in an email: “The real issue isn’t so much what Allergan [AGN] may prove/disprove or whether Treasury overstepped the authority . . . the real question is whether Pfizer reads today’s [regulations] as reason enough to not continue to pursue the deal.”
There is a $3.5 billion breakup fee written into the deal, according to a regulatory filing, but the fee would be only $400 million if the deal falls through because of “an adverse change in law.”
The Obama administration has struggled to stem the tide of inversions over the past few years. After the Pfizer deal was announced in November, Milwaukee-based Johnson Controls said it would merge with Tyco International and move to Ireland, saving the firm about $150 million a year in taxes. Last month, data provider IHS, which is based in Colorado, announced a $13 billion merger with Markit that would move its headquarters to London and save it about $260 million in taxes. Using this strategy, the U.S. subsidiary of the inverted company can take on a loan from its foreign parent company. The interest payments on that debt can then be deducted from the U.S. company’s taxable income. The Treasury Department wants to make the process more onerous.
In addition to rules potentially affecting Pfizer, the Treasury Department took aim at one of the most attractive parts of an inversion — earnings stripping.
Despite these new rules, Obama administration officials continue to argue that stopping inversions will require congressional action.
“While the Treasury Department actions will make it more difficult and less lucrative for companies to exploit this particular corporate inversions loophole, only Congress can close it for good, and only Congress can make sure that all the other loopholes that are being taken advantage of are closed,” Obama said.
Business industry leaders have argued that such deals will continue to make financial sense as long as the U.S. corporate tax rate, 35 percent, remains the highest in the developed world. The new Treasury rules could make U.S. companies less competitive while deterring foreign investment in the United States, Bruce Josten, executive vice president for government affairs for the U.S. Chamber of Commerce, said in a statement.
“Punishing the business community, as the Obama administration has proposed, is not the answer. The real solution is comprehensive tax reform,” he said.
There is a limited amount that can be accomplished through executive action, said Rep. Peter Welch (D-Vt.). “Congress now is full-monty complaining but taking no action,” he said. “We’re just hemorrhaging the resources that we need from companies to pay their fair share, [and] if we sit by and do nothing, we will see a continued hollowing-out of the middle class.”