U.S. pharmaceutical giant Pfizer announced Nov. 23 a record-breaking $160 billion merger with Irish firm Allergan, the biggest merger to-date involving the controversial strategy of tax inversion.
The move marks the beginning of the end of the ability to stop corporate tax inversions under current tax rules, said an expert on international tax law at Washington University in St. Louis.
“Despite the best intentions of the Obama administration, companies are finding ways to work around the regulations on tax inversion,” said Adam Rosenzweig, JD, professor of law.
The Pfizer agreement comes just four days after the administration of President Barack Obama enacted fresh restrictions on corporate tax inversions — reincorporating overseas in a country where the corporate tax rate is lower.
“Congress has enacted rules to try to prevent these from occurring as purely ‘paper’ moves but to permit real moves to other countries,” Rosenzweig said. “Congress did so by looking at the historic shareholders of the new foreign company. If a U.S. corporation changes its place of incorporation by merging with a foreign corporation, but more than 80 percent of its shareholders own the combined company after, the company is still treated as U.S. corporation for U.S. tax purposes.”
However, Rosensweig said, if the former shareholders of the U.S. corporation own between 60-80 perceent of the combined company, other strict rules apply but otherwise the “foreign” character of the company is respected.
If the former shareholders of the U.S. corporation own less than 60 percent of the combined company, then these anti-inversion rules do not apply at all, he said.
“Typically, most inversions have tried to fit within the 60-80 percent range because in that way a U.S. company could merger with a smaller foreign company and move its tax residence without significantly changing its management or business model,” Rosenzweig said.
Pfizer, on the other hand, Rosenzweig said, has structured its deal with Allergan such that its historic shareholders will only own 56 percent of the combined company post-merger.
“Thus, none of the special anti-inversion rules issued by Congress, the United States Treasury or the Internal Revenue Service will apply to Pfizer post-merger,” he said.
“For this reason, I believe the Pfizer/Allergan deal marks the beginning of the incentive for U.S. companies trying to fall under the 60 percent threshold rather than comply with the increasingly onerous anti-inversion rules for 60-80 percent inversions,” Rosenzweig said.
While it is true that Congress could lower the threshold, say to 50 percent, Rosenzweig said, “I believe that all this would do would be to encourage less than 50 percent inversions — which are otherwise known as foreign takeovers.
“It would probably strike many people as odd to adopt a tax rule that encourages foreign takeovers of U.S. companies, but the Pfizer/Allergan deal could indicate that this would be the case if Congress lowered the threshold further,” he said.
“That is why I think of the Pfizer/Allergan deal as the beginning of the end of the anti-inversion rules as currently in place.”