Pfizer-Allergan deal sparks fresh tax inversion angst in US

Pfizer faces political risks in Washington if it proceeds with a bid for Allergan, but with little chance of legislation to curb such tax inversion deals, the Obama administration may be able to throw up only limited obstacles.

Politicians are widely seen as unlikely to tackle major tax code changes before the 2016 presidential election, but they were already scolding Pfizer publicly on Thursday, showing that companies considering inversion deals do face reputational risk.

Pfizer is already facing political pushback and that is only likely to intensify with the US presidential campaign underway, as candidates take aim at high prescription drug prices and companies looking to avoid paying taxes.

A spokesman for Democratic front-runner Hillary Clinton said the candidate had not seen details of the proposed merger, but is against tax inversion maneuvers, in which US companies relocate overseas to take advantage of lower tax rates. "

Ms 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.

Democratic Senator Charles Schumer of New York said in a statement: "The continued pursuit of inversions, mergers and foreign acquisitions of major US companies for purely tax purposes shows there is a lot more work to be done to stop them."

From the right, developer and Republican presidential candidate Donald Trump said the deal was a reminder that the US tax code needed an overhaul. "These corporate inversions take capital and, more importantly, jobs offshore," he said in a statement. "We need leadership in Washington to get the tax code changed so companies will be coming to America, not looking for ways to leave."

Billionaire investor Carl Icahn, who has endorsed Mr Trump and launched a $150 million political action committee advocating tax reform to eliminate inversions, said a Pfizer-Allergan deal would result in the loss of the country's 10th largest company to Ireland. Analysts speculated a deal could be all or primarily done with stock because under new US rules aimed at curtailing tax inversions, shareholders of the overseas company must own at least 40 per cent of the combined entity.

No deal yet

New York-based Pfizer and Dublin-based Allergan say they have not reached an agreement as yet and declined to give details.

Ireland has been a frequent redomiciling destination for US corporations fleeing the local tax system, though most of them leave their actual core operations in the United States.

The latest wave of inversions crested in late 2014, when the Obama administration cracked down, making it harder both to do the deals and to realize their benefits.

A US Treasury Department spokesperson said further actions could be taken, but stressed that only Congress can slam the door completely.

Among the department’s options is tightening rules against a tax-dodging technique known as “earnings stripping” that is often a key component of inversions. This practice involves shifting profits earned in the United States to a lower-tax jurisdiction.

“We are continuing our review of a broad range of options for further action but there is a limit to what we can do administratively. Congress must take action to end this loophole ,” the Treasury spokesperson said in a statement.

Steven Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center, a think tank, agreed that earnings stripping was a good place for the Treasury to start.

“Otherwise you leave a loophole and incentive for these combinations to continue,” he said.

Reuters