Pharmaceutical companies Pfizer and Allergen will mutually terminate their proposed merger tomorrow morning, CNBC’s David Faber reported Tuesday night, citing sources familiar with the deal.
The $160 billion mega-deal was pitched as a way to help Pfizer cut its tax bill by relocating its domicile to Ireland, where Allergan is based. The tax rate for corporations in Ireland is 12.5%, far less than the US rate.
Pfizer was leaning toward walking away from the merger as new US regulations put more pressure on the deal Reuters reported earlier Tuesday.
Pfizer’s lawyers had presented ways to salvage the deal in light of the Treasury Department’s new measures, but the company did not seem inclined to pursue the merger, according to Reuters’ source.
Pfizer will pay Allergan a $400 million fee as part of their merger agreement, Faber reported.
Because the move can be seen as fleeing the US, tax inversions are not particularly politically popular. When the deal was announced in November, presidential candidates Sen. Bernie Sanders of Vermont and Donald Trump were among many who took a stance against it.
The government can discourage inversions by eliminating some of their economic benefits. One practice the Treasury on Monday said it would target is called earnings stripping, a way of jacking up interest payments to lower tax bills.
On Tuesday, US President Barack Obama spoke out against tax inversions, and shares of Allergan dropped by more than 16%.
The Treasury Department didn’t specifically refer to Pfizer’s deal in its statement. US Treasury Secretary Jacob J. Lew said in a release:
Treasury has taken action twice to make it harder for companies to invert. These actions took away some of the economic benefits of inverting and helped slow the pace of these transactions, but we know companies will continue to seek new and creative ways to relocate their tax residence to avoid paying taxes here at home.
Here’s the Treasury’s plan, according to the release:
- Limit inversions by disregarding foreign parent stock attributable to recent inversions or acquisitions of U.S. companies. This will prevent a foreign company (including a recent inverter) that acquires multiple American companies in stock-based transactions from using the resulting increase in size to avoid the current inversion thresholds for a subsequent U.S. acquisition.
- Address earnings stripping by:
- Targeting transactions that generate large interest deductions by simply increasing related-party debt without financing new investment in the United States.
- Allowing the IRS on audit to divide debt instruments into part debt and part equity, rather than the current system that generally treats them as wholly one or the other.
- Facilitating improved due diligence and compliance by requiring certain large corporations to do up-front due diligence and documentation with respect to the characterization of related-party financial instruments as debt. If these requirements are not met, instruments will be treated as equity for tax purposes.
- Formalise Treasury’s two previous actions in September 2014 and November 2015.
Business Insider is awaiting confirmation from Pfizer and Allergan.
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