- Merger talks between pharma giants Pfizer and Allergan has brought the controversy of tax inversions—the moving of a corporate headquarters from the United States to a lower-tax country—back into the news.
- Allergan is headquartered in Ireland. Numerous companies once headquartered in the U.S. have moved there in recent years, often by merging with a company already headquartered overseas, in order to gain tax advantages.
- New York-based Pfizer's current effective tax rate is 24% and Allergan's is 15%, Reuters reported Wednesday.
Here we go again: A little more than a year after the Obama administration announced steps to curb inversions, Pfizer and Allergan are discussing a merger in which the tax advantage for Pfizer -- and the potential loss to the US Treasury—is obvious. Now the question is: Can and will the administration step in if a merger proposal is announced? And with a new president stepping into office in a little more than a year, will the two companies simply try to run out the clock?
Treasury Secretary Jacob Lew called inversions "an unfair loophole" when he announced new rules in September 2014 that were designed to make them harder. Some of those involve complex calculations on earnings of foreign subsidiaries, but a broader one is that a US company has to own less than 80% of an overseas company it takes over in a merger.
That—in theory, at least—makes an inversion more difficult. One potential way around this, though, is to have the overseas company acquire the US company, although Pfizer is the larger entity in this particular scenario.
There has been plenty of inversion activity in the biopharma sector—and in fact, critics often call out Big Pharma whenever inversions are mentioned. A Pfizer-Allergan merger would be the biggest ever in the sector, and although there's some early speculation the administration might try some novel tactics to block the move, the real cards it has to play might be few barring an act of Congress.