Treasury Implements New Rules Aimed at Inversions, Other Tax Strategies, Scuttling Pfizer-Allergan Deal and Evoking Howls from Pharma

Surprisingly, the Treasury Department took aggressive action to make it much more difficult to do corporate inversions, a recently-popular strategy by which a US company was acquired by a smaller firm in a lower-tax foreign jurisdiction. Voila! The new home country is where the taxes are filed, lowering the tax rate. The merged companies would engage in additional strategies to further lower the tax bill. Within hours of the announcement, Pfizer executives had decided to scupper their $150 billion merger with Allergan, which would have moved Pfizer’s headquarters to Ireland.

It seems out of character for a business-friendly Administration to take this tack. Last year, the Treasury announced some measures intended to curb inversions, which had recently become both visible and controversial. Yet almost immediately after the rule change, the widely-discussed Hortons-Burger King merger took place, which arguably was not driven mainly by tax considerations. That may have been seen as an embarrassment. Moreover, as the planned Pfizer-Allergan deal illustrates, many of the inversions were being done by pharmaceutical companies, which are deservedly unpopular right now. Drug companies overall have been pushing through price increases at rates well in excess of the inflation rate, and the proceeds have gone for stock buybacks, dividends, executive pay, and marketing over R&D. And to add insult to injury, US pharmaceutical companies get considerable subsidies in the form of large amounts of government-funded research. And companies like Valeant represent the McKinsey vision for what the industry should look like: patent trolls who maximize the value of their intellectual property, rather than having any real interest in combatting disease.

So the open question is whether Treasury intended its rule changes last year to be a warning shot, and the parties that should have gotten the message decided to ignore it, or that the Administration was particularly offended or embarrassed by the Pfizer-Allergan merger and decided to rouse itself.

One reason the Administration could act is that countries in advanced economies are coming to the point of view that corporate tax minimization has gone to far. Admittedly, the austerian policies of the Eurozone are no doubt a big driver: countries that are budget-starved and squeezing their own citizens can’t afford to let big corporations be the equivalent of tax scofflaws, even if their moves are kosher under the current tax codes. From a European Commission press release this January:

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