Pfizer-Allergan merger in doubt as new U.S. tax inversion rules proposed

New rules cracking down on tax inversions would seem to make a proposed merger of one of the two largest pharmaceutical companies in the world unlikely.

The U.S. Treasury Department unveiled a new slate of rules Monday aimed at making tax inversions — complex merger structures whereby U.S. companies move their headquarters overseas to jurisdictions with more lax tax policies — less worth the effort.

Pfizer Inc. is in the midst of one such deal, a massive $160-billion tie-up that would see the company merge with Ireland-based drug company Allergan and move its headquarters and much of its taxation authority to that country, which has a more favourable corporate tax regime.

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Details so far are sparse, but essentially the rules seek to limit internal corporate borrowing that moves profits out of the reach of Uncle Sam. A major part of the rules will involve more scrutiny to ensure that the deals are close to being true mergers and not simply takeovers, where large U.S. companies swallow much smaller ones in foreign locales with lower taxes.

U.S. President Barack Obama welcomed the new rules when he spoke from the White House on Tuesday.

'The Obama administration [is] sending a message to all U.S. companies contemplating inversions, and that message is 'Don't'- Analyst Steve Brozak

"When companies exploit loopholes like this, it makes it harder to pay the bills for the things that are going to keep America's economy going strong for future generations," Obama said. "It sticks the rest of us with the tab."

Calling them "insidious," Obama added tax inversions hurt the middle class because the lost revenue "has to be made up somewhere."

But the regulations also would not make the practice illegal, something Obama has advocated for some time. Only Congress can outlaw the practice. Obama called on its Republican leaders to "end this kind of irresponsible behavior" by enacting comprehensive tax reform.

"Only Congress can close it for good," he said, referring to the inversions loophole.

The two companies say they are currently reviewing the new rules, which can be put into place without congressional approval since they are largely regulatory in nature.

"The Obama administration isn't just sending a message to Pfizer, it's sending a message to all U.S. companies contemplating inversions, and that message is 'Don't," said analyst Steve Brozak, president of WBB Securities LLC.