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Consequences of break up of Pfizer Allergen inversion deal

Consequences of break up of Pfizer Allergen inversion deal

With the US Treasuries new tax rules in place Pfizer- Allergan deal is off and the companies future on the hook. Pfizer’s major drugs are coming off patents; it employs 3,300 people in the US.

As reported by the Washington Post the new tax rules announced by the US treasury seem to be targeting at the 160bn Allergan/pfizer merger; the deal undoubetly will have deprieved the US treasury of billions of dollars of tax revenues.As soon as the US President and his Treasury, Secretary, Jack lew announced their decision, pfizer was seen walking away from its deal with Allergen; a pact which was underway due to the annual tax savings of $ 1.3 bn, it would have yielded in terms of annual tax savings for Pfizer. Ireland seems to be in the US administration’s eyes.

The two prominent reasons for US sitting up to inversion deals of late and deciding to change its tax laws can be linked to it having the highest company tax rates in the world of 35 percent; Irish company tax rates being upto 12.5 pc; and US companies being liable for tax on their worldwide income.

According to alleged distortions, US companies have to retrieve $2.4 trillion of foreign profits.The reason why companies prefer to keep their profits overseas being not wanting to pay taxation if brought home.

According to CTJ Apple and pfizer are two companies which have the largest overseas profits piles overseas. Apple with a $200 in 2015 which went up by another $42billion in 2015, and Pfizer holding a second position at $193 bn, an increase of $18 bn on its 2014 amount.

The two distortions that made the US treasury sit up and change taxlaws include: unrepatriated profits and tax inversions wherein the smaller overseas company purchase of a larger US group saw the bigger company switch its tax domicile to that of the smaller one.

With tax structures overseas being far less that the US, the last few years have seen many big US giants merge with smaller counterparts overseas be it Ireland or any other country, which distinctively have smaller taxation structures. According to M&A website Dealogic 40 major tax inversions havetaken place since 2012; the first inversion taking off in the year 1980.

The american admnistration having failed in two earlier attempts on tax inversion drives has finally managed to dig its nails into this tax invasion drive by big companies. Pfizer Allergan
being one of the biggest at a whopping @160 bn, almost twice as big as the last similar transaction.

The new rules qualify a company for tax inversion only if the acquiring company shareholders own at least 40 pc of the merged company and what has to be kept in mind is the fact any shares issued by the purchasing company in the previous three years are to be overlooked when calculating the 40percent line of demarcation.This prevents the acquiring company from creating a fraudulent 40 percent stake. This three year look back makes it
extremely difficult for acquring companies to get into an ‘earning stripping’ position by gleaning their american copunterparts of excessive interest on loansfrom their overseas partners.Besides Ireland US is also facing inversion problems with companies from Netherlands and UK.

President Obama while announcing the new tax law changes linked it to the Pananma Papers saying ‘tax invasion was a big global problem’ and defining inversions as ‘insidious tax loopholes.’ He accused the inversion companies for ‘gaming the system’.

The floundering of the Allergan deal is the second failure in the past two years; the earlier inversion bid being Astra Zeneca which failed due to R and D problems and security issues. Some of the other problems they face being some of the pfizer patents coming to an end which signifies a drop in sales.

The break down of the deal has been welcomed by the company shareholders who felt that the company was paying Allergan through its nose. This being apparent in the fact that the
breakdown has resulted in a 3 % raise in the Pfizer share and Allergan facing an astonishing drop of 20%.

The two tasks at hand for Pfizer now,after the Allergan deal fall through being R and D development and looking for fresh acquisition/inversion deals. The two likely companies for this being Astra Zeneca and GlaxoSmithkline. Astra Zeneca has in the past declined keeping in mind the British jobs security.

Pfizer is likely to face a similar issue with GSK if it approaches the company for inversion.What is to be understood is that these two acquisitions come at a heavy price and what needs to be mulled over is whether the price is worth the purchase.

Source: Inputs from the Washington post
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