Pfizer and Allergan Are Said to End Merger as Tax Rules Tighten – New York Times

By the time Allergan was ready to negotiate its biggest deal yet, it had a market cap of about $ 100 billion, making it a more fitting counterpart for Pfizer, under the rules from 2015. Though their planned deal is not technically an inversion, since it is Allergan that is the buyer in the transaction, the move would accomplish the same goal.

It is that string of previous acquisitions that is a focal point of the new Treasury Department rules. The administration had a name for foreign companies that bulked up by buying American ones for tax advantages: "serial inverters." The new rules aim to restrict them by disregarding the value of the American businesses acquired over the last three years.

"It's funny how the rules happen to almost fit perfectly with this deal," said Kevin Kedra, an analyst at Gabelli & Company, referring to Pfizer and Allergan. "It would be easy to argue that's not coincidence. I would think it certainly seems directed toward derailing this specific deal."

In response to the new rules, Allergan's shares declined almost 15 percent on Tuesday, while. Pfizer's shares gained about 2 percent.

A Treasury spokeswoman said that the regulator declined to comment on specific deals and was addressing the issue more broadly.

"It is important to note we are only aware of publicly available information and do not have any insights into specific transactions," the spokeswoman said. "Our actions were based on our general understanding of abusive practices, not on any specific transaction."

There is perhaps less of a probability that Treasury's new rules will derail any of the other six inversion deals that are still pending, according to analysts, including Canada-based Progressive Waste Solutions' acquisition of Waste Connections and Johnson Controls' merger with Irish-based Tyco.

Shares in those four companies declined on Tuesday, largely on concerns about losing some of their tax benefits.

Progressive Waste and Waste Connections said in a statement that it expected the new rules to have limited effect on the financial aspects of its merger and remained committed to the deal.

And a spokesman for Johnson Controls said, "We're reviewing the Treasury regulations, but we're not going to speculate at this time what, if any, impact it will have on the proposed merger with Tyco."

In addition to targeting serial inverters, the Treasury Department also took aim at so-called earnings stripping. This technique is used not just by inverted companies but by many multinationals. It involves making the American subsidiary borrow from the foreign parent company. That gives the United States business interest payments they can deduct from earnings. Because the loan is within the company, the cost is not reflected on financial statements.

Treasury's way of clamping down on earnings stripping is to treat that debt as stock, effectively getting rid of the interest payments altogether. Without the interest payments, the United States subsidiaries would be taxed on the full basis of their United States earnings.

Though Pfizer and Allergan's deal was less affected by earnings stripping, the potential consequences of the new Treasury rules could go well beyond corporate inversions, according to tax experts.

"To me, the earnings stripping part of this is quite clearly the most significant of the changes they've put out," said Stephen E. Shay, a senior lecturer at Harvard Law School and former deputy assistant secretary for international tax affairs in the Treasury Department.

Some analysts questioned whether the Treasury Department had the authority to enact its latest proposed rules. The administration drew in part upon an expansive reading of the tax code as the basis for the regulations, though a few experts called that move into question.

"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," Robert Willens, an independent tax consultant, wrote in a note to clients on Tuesday.

Still, any legal challenge to the Treasury Department's new rules could potentially take years — with no guarantee of victory.

"There are conceivably ways in which the deal could still happen if Pfizer and Allergan were to legally challenge these rules in court," said Mr. Kedra at Gabelli. "Given the time and uncertainty of that process, it's probably a low-probability event."

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