Treasury unlikely to block drug megamerger

New tax inversion rules won’t override deal, experts say

Despite the Obama administration’s stepped- up regulatory attack on tax inversions, experts say the rules likely won’t block the $ 160 billion deal announced Monday by U. S. pharmaceutical giant Pfizer and Ireland- based rival Allergan.

Typically, tax inversions involve a U. S. firm reincorporating in a low- tax country as part of an effort to lower the company’s future tax bills. The company usually maintains its U. S. operations even after the reincorporation.

But the new deal technically is structured with Allergan acquiring Pfizer, even though the Dublin- headquartered company is far smaller than its New York Citybased merger partner.

Allergan shareholders would own 44% of the new company and Pfizer investors would own 56%. Pfizer’s ownership share would fall below the 60% threshold to qualify as a tax inversion under the U. S. tax code, said Robert Willens, an international tax law expert New York City.

“If it’s not 60%, it’s not an inversion,” Willens said.

Treasury officials “may not care for” the pharma industry megadeal, “but there’s not a lot they can do about it,” he added.

Instead of a tax inversion, the deal is “much more like a straightforward acquisition by a foreign company of a U. S. company,” said Larry Harding, who heads corporate development activities for Radius, a Boston company that helps U. S. firms deal with financial, tax, and other logistics of operating overseas.

“There’s no U. S. legislation that would override a foreign company’s purchases,” Harding said.

Treasury Secretary Jacob Lew signaled the limits of his authority when he announced new taxinversion rules Thursday, the sec- ond set of regulations proposed in little more than a year to prevent what he termed an erosion of the nation’s tax base.

“We look forward to continuing to work with Congress ... to reform our broken business tax system and to eliminate inversions for good,” Lew said.

In a statement after Lew issued new Treasury rules but before the deal was formalized, Sen. Orrin Hatch, R- Utah, chairman of the Senate Committee on Finance, said the best way to resolve concern over tax inversions “would be through a comprehensive tax overhaul that lowers the corporate tax rate and shifts the U. S. to a territorial tax system with base erosion protections.”

Sen. Harry Reid, D- Nev., the Senate’s minority leader, in a Monday statement said he was “disappointed that Pfizer has decided to skirt its responsibility to pay its fair share so it can increase profits.”

Former secretary of State Hillary Clinton, a Democratic presidential candidate, in a Monday statement said the merger “will leave U. S. taxpayers holding the bag.” She pledged to propose steps to prevent tax inversions.

Sen. Bernie Sanders, I- Vt., another Democratic presidential contender, in a statement said the merger “would be a disaster for American consumers who already pay the highest prices in the world for prescription drugs. It also would allow another major American corporation to hide its profits overseas.”