Allergan’s shares have dropped as much as 20% in after-hours trading on Monday after the US government said that it will do more to stop tax inversions, or mergers aimed at helping a company move its domicile offshore in order to avoid paying taxes.
The Dublin-based drugmaker is in the middle of a merger with Pfizer that was touted as an effort to cut the taxes Pfizer pays in the US. Pfizer’s shares are climbing in late trading.
The $160 billion megamerger, announced in November 2015, intends for Pfizer to relocate its headquarters to Ireland, where Allergan is incorporated and the tax rate for corporations is 12.5%, far less than the US tax rate.
Because the move can be seen as fleeing the US, tax inversions are not particularly politically popular. In November, when the deal was announced, everyone from US Sen. Bernie Sanders (I-Vermont) to Donald Trump took a stance against the deal.
US Treasury Secretary Jacob J. Lew said in a release:
Treasury has taken action twice to make it harder for companies to invert. These actions took away some of the economic benefits of inverting and helped slow the pace of these transactions, but we know companies will continue to seek new and creative ways to relocate their tax residence to avoid paying taxes here at home.
In response to the Treasury’s move, Pfizer said in a statement:
We are conducting a review of the U.S. Department of Treasury’s actions announced today. Prior to completing the review, we won’t speculate on any potential impact.
Allergan declined to comment.
This isn’t the first time the Treasury has tried to squash a tax-inverting merger. In 2014, AbbVie called off its inversion deal with Shire after Treasury announced executive moves to attempt to curb inversions.
Here’s the Treasury’s plan, according to the release:
- Limit inversions by disregarding foreign parent stock attributable to recent inversions or acquisitions of U.S. companies. This will prevent a foreign company (including a recent inverter) that acquires multiple American companies in stock-based transactions from using the resulting increase in size to avoid the current inversion thresholds for a subsequent U.S. acquisition.
- Address earnings stripping by:
- Targeting transactions that generate large interest deductions by simply increasing related-party debt without financing new investment in the United States.
- Allowing the IRS on audit to divide debt instruments into part debt and part equity, rather than the current system that generally treats them as wholly one or the other.
- Facilitating improved due diligence and compliance by requiring certain large corporations to do up-front due diligence and documentation with respect to the characterization of related-party financial instruments as debt. If these requirements are not met, instruments will be treated as equity for tax purposes.
- Formalize Treasury’s two previous actions in September 2014 and November 2015.
As reported by Business Insider