Obama administration cracks down on companies moving abroad for lower taxes

On Monday, the Treasury Department announced a set of regulations designed to limit the ability of corporations to evade US taxes. The rules may put a damper on the planned merger between Pfizer and Allergan, one of the largest inversion deals in history.

The Obama administration wants to make sure American corporations are paying American taxes. 

On Monday, the Treasury Department announced several regulations designed to make it more difficult for US companies to buy up foreign firms and move their headquarters overseas, a move known as corporate tax inversion. Notably, the rules could impact pharmaceutical giant Pfizer's plans to acquire Botox-maker Allergan and move operations to Dublin, Ireland. 

In a press briefing in Washington Tuesday, President Obama said the new rules would stop companies from taking advantage of “one of the most insidious tax loopholes out there, fleeing the country just to get out of paying their taxes.”

Some of the new rules will make it more difficult for companies to invert and reduce their opportunities to “strip” their earnings. Like teenagers, companies looking to reduce their tax burden will sometimes issue tax debt to their foreign parents, a strategy known as “earnings stripping.” Additionally, Mr. Obama said Tuesday, the regulations will help prevent foreign companies, or so-called "serial inverters," from completing several such deals in a short period of time. 

In a press release, US Treasury Secretary Jacob J. Lew said, “Today, we are announcing additional actions to further rein in inversions and reduce the ability of companies to avoid taxes through earnings stripping. This will have an important effect, but we cannot stop these transactions without new legislation. I urge Congress to move forward with anti-inversion legislation this year.”   

The Treasury has made several attempts discourage corporate inversions, which have become a popular way for US companies to reduce their tax burden. In November 2015, the Treasury introduced a new set of inversion regulations, after a past set of regulations released in September 2014 did little to impact the practice. That same month, however, Pfizer and Allergan, which is based in Dublin, announced a $160 billion merger deal.

Under the terms of the merger, one of the largest inversion deals in history, Pfizer would move its corporate tax residence to Ireland, a step that would reduce its tax liability by about 8 percent.

Companies invert by acquiring either one or sometimes several foreign companies. The practice is are extremely detrimental to the US economy, Secretary Lew noted, because when companies invert, they still enjoy all of the benefits of the US economic and political system, without paying their fair share of taxes.

However, many companies argue that the US tax rate is so high that it prevents them from being globally competitive. In 2014, Burger King merged with Canadian coffee-and-doughnut chain Tim Hortons and moved north to Canada, Tim Horton’s home base, under the new name Restaurant Brands International.

“A lot of it’s legal, but that’s exactly the problem,” Obama said. “lt’s not that they’re breaking the law. It’s that the laws are so poorly designed.”

Pfizer and Allergan issued a joint statement in response to the new regulations from the Treasury, saying, “We are conducting a review of the U.S. Department of Treasury’s actions announced [Monday]. Prior to completing the review, we won’t speculate on any potential impact.”

Yet the Treasury’s move has led to some doubt on whether the planned Pfizer-Allergan merger will, in fact, go through. Allergan shares fell after the Treasury regulations were announced. Allergan shares were trading down, while Pfizer shares traded slightly up. These stock market indicators offer a hint that the Treasury Department regulations have a chance at preventing the merger from happening, John Colley, a Professor of Practice in the Strategy and International Business Group at Warwick Business School, writes in an e-mailed comment to The Christian Science Monitor.

“The move to limit tax inversions by the US government has wiped $20 billion off the share price of Allergan which broadly equates to the tax benefit arising from Pfizer merging with Allergan," he explains. "In effect this ruling is casting doubt on the proposed merger.” He added that the merger appeared to provide more of a benefit to Pfizer for the tax and growth prospects Allergan has to give.

Pfizer has been set on creating an inversion for years, and its CEO believes that the merger with Allergan will be beneficial to advancing research and rescuing the drug industry. If it isn’t able to acquire Allergan, its investors may push Pfizer to break up, splitting its R&D into new drugs and established drug brands into two companies.