Days after the U.S. Treasury Department released additional guidance that would further reduce the tax benefits of corporate inversions and make such transactions more difficult to achieve, U.S. global pharmaceutical company Pfizer Inc. and Allergan Plc announced a planned deal that could be the largest corporate tax inversion in 2015.
Pfizer and Allergan said they plan a transaction that amounts to a “reverse takeover transaction” under Irish law. Ireland is a common redomiciling destination for U.S. corporations because of its low corporate tax rate.
Reuters reported that the deal is valued at $160 billion. To avoid potential restrictions, the transaction is being structured as smaller Irish-based Allergan buying larger U.S.-based Pfizer. The combined company will be called Pfizer Plc.
The Mechanics of Inversions
Corporate inversions generally involve a corporation in the United States attempting to minimize its U.S. tax liability by effectively moving its legal domicile to a lower-tax foreign jurisdiction.
At least a dozen U.S. companies pursued tax inversions from 2013 through September 2014, according to the July 7 final report issued by the Senate Finance Committee international tax reform working group. These inversions occurred despite the fact that Congress and the IRS have attempted to restrict or eliminate the tax benefits.
Down the Road
Recently, the IRS issued a notice that previews regulations to be issued that would further reduce the tax benefits of corporate inversions and make such transactions more difficult to achieve.
While further action will be undertaken “in the coming months” to address such transactions (including potential guidance on earnings stripping), Treasury Secretary Jacob Lew acknowledged that “there is only so much Treasury can do to prevent” corporate inversions. Any definitive action to address corporate inversions must come from Congress.
UPDATE: Pfizer Announces Termination of Proposed Combination with Allergan