Global Glance: April 11, 2016
A quick look at intriguing international stories
By John Bostwick, Managing Editor, Radius
Welcome back to Global Glance. This week we’ll do something a little different and look at a single story — the recent termination of the mammoth Pfizer-Allergan merger — a little more closely. Hang on to your profit and loss statements, then, here we go.
In 2014 we published a blog post titled, “Thinking About a Corporate Inversion? Time Could Be Running Out.” It noted that “American regulators have made it progressively more difficult for corporations to shed their American registrations and reincorporate in lower-tax jurisdictions.”
The post and its title were prescient. Last Wednesday, Pfizer announced that its $160 billion merger agreement with fellow pharmaceutical Allergan was terminated by mutual consent. Pfizer CEO Ian Read is quoted in the press release as saying: “Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies.” Putting aside the fact that no one would ever actually say that, Read does not explicitly mention here or elsewhere in the release that the merger was a corporate inversion designed in large part to lower Pfizer’s corporate tax obligations by moving its headquarters to Ireland, where Allergan is based. (As a CNBC article explained, “Pfizer had reportedly stood to cut its costs by more than $1 billion a year by changing its domicile.”)
The release does, however, mention the reason for the termination, noting that it “was driven by the actions announced by the US Department of Treasury on April 4, 2016, which the companies concluded qualified as an ‘Adverse Tax Law Change’ under the merger agreement.” The Treasury Department’s announcement about the new rules — issued in conjunction with the IRS — can be found here, but I recommend the following Wall Street Journal piece.
The Journal explains that the new US tax rules, which are targeted at regular or “serial” inverters like Allergan, “would disregard three years’ worth of US acquisitions when determining a foreign company’s size under the tax code.” Basically, for inversions to “reap maximum benefits shareholders of the inverting company should own between 50% and 60% of the combined entity.” When those three years’ worth of US acquisitions are stripped off of Allergan’s books, the Pfizer-Allergan deal no longer provided the desired tax benefits. The Journal quotes White House press secretary Josh Earnest as saying the Treasury Department was not “focused on a specific transaction” when it rewrote the tax rules but on “loopholes.” But the article adds that the “Treasury’s new three-year rule is less likely to trip up other companies that have been pursuing inversions,” implying perhaps that the changes may have been more focused than advertised.
The CNBC article mentioned above quotes Allergan CEO Brent Saunders as saying he believes the merger with Pfizer was in fact specifically targeted by US authorities. Here’s an excerpt: “It really looked like they did a very fine job of constructing a rule here — a temporary rule — to stop this deal, and obviously it was successful. … For the rules to be changed after the game has started to be played is a bit un-American.”
Ryan Ellis, who wrote an opinion piece for Forbes last week, tends to agree. He notes that if the Treasury Department did, as some claim, specifically set out to undermine the proposed Pfizer-Allergan merger, then it “has acted like a banana republic bureaucracy and changed the rules late in the game just to make a political point.” He adds that “terms like ‘serial inverters’ and ‘earnings stripping abusers’ were thrown around the same way a Hugo Chavez strongman might deride a company for not giving his regime enough tribute.” In Ellis’ opinion, the new rules add a horrible element of uncertainty to the US regulatory environment, which will act as a repellant to global investors.
For a different take on the merger and the new Treasury Department and IRS rules, check out the New York Times’ editorial, “A Corporate Tax Dodge Gets Harder.” It notes that “40 American companies have become inverted over the past five years, while tax laws have failed to keep pace with tax-avoidance strategies,” and that “the Treasury had to act to stop inversions because Congress, still in the grip of an anti-tax Republican majority, won’t.” The editorial also claims that the only difference between a US company and a former US company that has inverted is that the latter no longer has to pay US corporate tax. The Times notes that Allergan itself was once a US-based company known as Actavis that inverted to Ireland three years ago. Far from acting like the banana republic mentioned by Ellis in Forbes, the Times editors believe the “Treasury Department deserves credit for tackling the problem” of inversions.
For an Irish view of the situation, read this piece in The Irish Times. It emphasizes the fact that while the deal itself was quashed, lawyers and accountants on both sides of the Atlantic have greatly benefitted. It also remarks on one unpleasant reality of such inversions; they are according to the Times, “a source of yet more international criticism of Ireland’s corporate tax regime.” The piece ends like this: “It goes without saying … that Ireland could do without negative inversion publicity.”
For American readers, that last observation does not in fact “go without saying.” Virtually all articles in the mainstream US press that I’ve read — including those mentioned in this post — place the blame for corporate inversions on US tax authorities, US lawmakers and/or US companies, but never on Ireland’s corporate tax regime. With increased global efforts to create a single set of international tax rules, the US press, public and authorities may begin to more closely scrutinize countries with irresistibly low corporate tax rates.