Pharmaceutical companies Pfizer and Allergan have announced a record-breaking $155bn (£100bn) deal that looks sure to prompt an international row over corporate tax avoidance.
The deal, which would create the world’s biggest drugmaker by sales, is the latest in a series of takeovers in which a US company effectively relocates its headquarters overseas to exploit another country’s lower corporate tax regime – a process known as tax inversion.
Viagra-maker Pfizer, one of the top names in corporate America, would be based in Ireland, where Allegan is headquartered, should the deal be approved. Effectively, Pfizer is pursuing a reverse takeover of the Irish-based Allergan, which makes Botox, with the smaller company buying New York-based Pfizer.
After the sale the combined company will be renamed Pfizer PLC and continue to trade on the New York Stock Exchange. Pfizer’s current tax rate is about 25% and would drop below 20% in Ireland, analysts estimate.
The long rumoured deal is likely to come under intense political pressure. President Barack Obama has called inversions “unpatriotic” and Democratic political hopefuls Hillary Clinton and Bernie Sanders have both criticised inversions, alongside high drug prices.
Inversions will cost the US taxpayer $19.5bn over the next 10 years, according to Congress’s joint committee on taxation. Pfizer is joining a growing number of big US companies now officially based overseas for tax purposes including Burger King (Canada) and Chiquita Brands (Ireland), which have used reverse takeovers to cut their tax bills.
Hillary Clinton is “committed to cracking down on so-called ‘inversions’, where a company chooses to leave the US on paper to game the tax system, and believes we should reform our tax code to encourage investment in the US, rather than shipping earnings and jobs overseas,” Clinton spokesman Ian Sams said last month.
Republican poll leader Donald Trump and rival Marco Rubio have blamed the US tax code and pledged to cut US corporate tax rates in order to stop inversions.
Ian Read, Pfizer’s Scottish chief executive officer, told the Wall Street Journal last month that the US’s high tax rates meant Pfizer was competing “with one hand tied behind our back”. He said he had tried and failed to lobby for tax reform in Washington.
Anders Dahlbeck, tax justice policy adviser of non-governmental organisation ActionAid, said: “This is just the latest example of a multinational company exploiting the global race to the bottom on corporate tax rates to avoid paying their fair share.
“This is part of a global problem with huge impacts on the lives of people living in poverty. Poor countries are blighted by tax avoidance with the International Monetary Fund estimating that they lose $200bn per year to tax avoidance.
“If the scourge of global poverty is to be tackled governments must listen to the public and take bold action to tackle tax avoidance and ensure that multinationals pay their fair share of tax wherever they operate.”
The announcement comes as the US Treasury Department tries to block such deals. Earlier this month, the Treasury announced new rules designed to make it harder for a US company to buy a foreign company and relocate the combined entity’s address. The Treasury has yet to comment on how the proposed rules would affect the Pfizer-Allergan deal.
Treasury secretary Jack Lew recently told CNBC: “US companies are currently taking advantage of an environment that allows them to move their tax residence overseas to avoid paying taxes in the US, without making significant changes in the nature of their overall operations.
“While we intend to take additional action in the coming months, there is only so much the Treasury Department can do to prevent these tax-avoidance transactions,” said Lew. “Only legislation can decisively stop inversions.”
But corporate experts are doubtful that significant change is coming. “This is an issue people shout about and then forget about. We see it each time one of these inversions is announced,” said Peter Henning, professor of law at Wayne State University. “This could be a campaign issue, but really what are they going to do? Get legislation through Congress? They can’t even pass a budget.”
The alternative, he said, was to push for tax reforms to ensure corporations stay in the US. “But tax breaks for corporations is not a platform I’d run on,” he said.
Last year the UK’s AstraZeneca rejected a $119bn merger proposal from Pfizer. The bid attracted criticism from politicians on both sides of the Atlantic as well as AstraZeneca’s board and unions worried about job cuts.
Under terms of the Allergan deal, the companies will exchange 11.3 Pfizer shares for every Allergan share. The deal also contains a cash component of between $6bn and $12bn.
“The proposed combination of Pfizer and Allergan will create a leading global pharmaceutical company with the strength to research, discover and deliver more medicines and therapies to more people around the world,” said Read.
“The combination of Allergan and Pfizer is a highly strategic, value-enhancing transaction that brings together two biopharma powerhouses to change lives for the better,” said Brent Saunders, Allergan’s chief executive officer.
The companies said the deal represents a roughly 30% premium to Allergan’s closing price on 28 October, the day the Wall Street Journal reported the companies were in talks.