Pfizer Deal for Allergan Could Spark Political Fight Over Taxes

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Can Allergan-Pfizer Affect Change on Tax Inversions?
  • Allergan, Pfizer confirm they are in early-stage talks
  • U.S. drugmaker could use Allergan purchase to cut tax bill

Ian Read, meet Donald Trump and Hillary Clinton.

If the Pfizer Inc. chief executive officer does eventually make a deal with Ireland-domiciled Allergan Plc, it could be a way for the biggest U.S. drugmaker to finally escape the country’s high corporate tax rate through what’s known as a tax inversion.

It could also put the drugmaker squarely in the middle of a political tug of war. Clinton, the leading Democratic presidential candidate, and Senator Bernie Sanders, running close behind, have both harshly criticized the industry over price increases for drugs -- sinking some industry stocks in the process. Both have promised to end tax inversions.

"Hillary Clinton believes that our entire economy benefits when companies invest for the long term, not when they undercut competition by consolidating markets or juice profits by gaming the tax code," Ian Sams, a spokesman for Clinton’s campaign, said in an e-mail, adding that Clinton "is committed to cracking down on so-called ‘inversions.’"

Trump, who leads many polls for the 2016 Republican nomination, has said that U.S. companies “don’t have the loyalty to the United States that they used to have,” and vowed to lower tax rates to get them to keep their legal addresses here. Other Republican candidates, including Senator Marco Rubio, have called for similar policies.

“It seems likely that there could be near-immediate political backlash,” said Timothy Anderson, an analyst with Sanford C. Bernstein & Co. “Coupled with the heat on drug pricing, going after inversions will be another way to try and keep drug companies on their back foot.”

Biggest Ever

Pfizer and Allergan, in separate statements Thursday, confirmed that they were in friendly, early talks about a combination. While the companies didn’t disclose any financial terms, a deal would probably be the largest ever in the drug industry.

It would also be the biggest ever U.S. tax inversion, a process by which a company shifts its legal address abroad to take advantage of lower tax rates and access to overseas profits, while keeping its operations in America. Allergan, for example, moved its legal address to Dublin in a previous deal, while keeping its main executive offices in New Jersey. The U.S. has the developed world’s highest corporate tax rate, at 35 percent.

At an appearance Thursday at an event in New York, Pfizer CEO Read said the company is at a competitive disadvantage by having its tax domicile in America. Foreign-domiciled companies with lower tax rates can invest more in research, he said.

Spokesmen for Trump and Sanders didn’t immediately respond to requests for comment.

The U.S. has acted previously to try to slow down tax inversions, after about 50 companies -- many of them drugmakers -- used deals for companies outside the U.S. as a way to move their own legal addresses.

It’s possible a move by Pfizer could prompt additional action by the U.S.

“What the U.S. Treasury may do could also cause some consternation among investors,” Anderson said. “It threatened that there could be additional measures in the future. Will it come back with more, or was this bluster?”

In the past, the Pfizer CEO has said U.S. politics won’t stop him. “I see no reason why we wouldn’t be able to do an inversion,” he said in October 2014 when asked about U.S. rules meant to slow or stop the transactions.

Trump called for a lower corporate rate. “Taxes are too high,” he said during an Oct. 16 interview with Bloomberg Television. “We better do something about it fast. In my opinion, there’s no way you can legislate that you can’t leave.”


Rubio, during an interview with CNBC Thursday, said Pfizer was only acting in its own interest. "We can rail all we want about how unpatriotic it is and how angry we are,” he said. “They have a legal obligation to their shareholders to maximize profits, as long as they can do so legally.”

Even Carl Icahn, the billionaire investor known for picking fights with corporate executives, has said he will put $150 million into a new super-PAC that would push politicians for changes to the way U.S. corporations are taxed on their earnings abroad.

Yet Pfizer’s move in the middle of the presidential campaign, where there’s already a focus on the drugs industry, may be a gamble, said Sam Fazeli, an analyst with Bloomberg Intelligence.

“We’re just in the heat of discussions about some specialty pharma companies price gouging,” Fazeli said during an interview with Bloomberg Television Thursday. “I don’t know if the politicians are ready for a blockbuster deal that takes loads of cash out of the Treasury’s coffers.”

Treasury Rules

The U.S. Treasury Department issued a proposal in September 2014 to try to stop inversions. The notice said the government would make it harder for U.S. companies to borrow against their foreign cash to finance inversions. It also tightened the calculations for when a deal triggers anti-inversion restrictions in the tax code and changed how passive assets would be counted in those tallies. And it limited maneuvers by companies to shrink themselves by paying extraordinary dividends before a deal so they would escape the arithmetic tests in the anti-inversion law.

While the rules aren’t final, they are retroactive and essentially in force.

“One needs to be very careful on legislative changes,” Read said on a conference call with investors Tuesday, when asked about a potential tax inversion. “So if there was a deal to be done, I’d prefer it to be done under the present Congress, and then you’re at a risk for the new Congress coming in and making changes in the rules.” Read was speaking generally, not specifically about a potential deal with Allergan.

“The company has to do what’s right for the shareholders, but there are a lot of questions to ask here,” Fazeli said.

Deals Go Through

The Treasury proposal last year impacted a handful of pending deals, but not all of them. By September 2014, Burger King Worldwide Inc., Medtronic Inc. and Mylan Inc. were all in the process of inverting -- and all eventually completed those deals. Others fell apart -- AbbVie Inc. dropped a $52 billion purchase of Shire Plc, in what would have been the largest tax inversion to date, blaming the proposed Treasury rules.

Allergan, then known as Actavis Plc, moved its tax address abroad in 2013, with its $5 billion purchase of Warner Chilcott Plc. And some tax inversions have moved forward in the past year, despite the Treasury rules. CF Industries Holdings Inc. plans to get a legal address in the U.K. after a deal with OCI NV. Terex Corp., which makes cranes and construction equipment, will end up with an address in Finland.

Companies that leave get a lower rate. Mylan has said its tax rate this year will be about 20 percent, while Allergan projects about 15 percent. Pfizer estimates it will pay 25 percent.

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