Merger consequences

Pfizer Deal Collapse Sparks Tax Warnings

Allergan boss Brent Saunders, left, and Pfizer chief Ian Read have called off their merger over tax concerns.
  • Why it matters

    Why it matters

    New U.S. regulations aimed at closing corporate tax loopholes exploited by companies moving overseas could negatively impact German and other foreign investment in America.

  • Facts


    • The U.S. Department of the Treasury on Wednesday released new regulations to restrict tax advantages of companies moving abroad purely on paper to avoid taxes.
    • Trade group Organization for International Investment warned the rule changes may impact foreign investment into the United States.
    • The United States has one of the highest corporate tax rates in the world at 35 percent in 2015 – compared to 12.5 percent in Ireland.
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It was a bitter pill for pharmaceutical firms Pfizer and Allergan – and one that many companies, including German ones, may soon also be forced to swallow.

The $160 billion (€140 billion) merger between the two companies was effectively killed off this week by the U.S. government’s crackdown on mergers involving U.S. companies that relocate their headquarters – at least on paper – to lower-tax locations of smaller overseas partners.

Following the U.S. Department of the Treasury’s release on Monday of new restrictions on so-called tax inversions, New York-based Pfizer and Ireland’s Allergan on Wednesday abandoned their proposed deal, citing the “adverse tax law change.”

Ireland’s corporate income tax rate of 12.5 percent – about one third the rate at which U.S.-based companies are taxed – was the magnet for a merger. It would have saved Pfizer an estimated $1 billion in annual taxes.

But such mergers had increasingly become a magnet for criticism.

“When companies exploit loopholes like this, it makes it harder to invest in the things that are going to keep America’s economy going strong.”

Barack Obama, U.S. President

“When companies exploit loopholes like this, it makes it harder to invest in the things that are going to keep America’s economy going strong for future generations,” President Barack Obama said Monday. “It sticks the rest of us with the tab. And it makes hardworking Americans feel like the deck is stacked against them.”

But one unintended consequence of President Obama’s crackdown is its possible impact on foreign investment into the United States. For instance, German companies, which could benefit in the global market for mergers and acquisitions, could suffer negative consequences in the United States.

On the one hand, the regulation eliminates U.S. merger rivals that drive takeover prices higher purely because of billions in tax benefits. On the other hand, the new rules go so far that they could boost the tax burden of German and other foreign companies with U.S. subsidiaries.

Clearly, there is some concern.

“The Administration’s sweeping proposal will increase the cost of investing and expanding across the United States for all foreign companies and put at risk more than 12 million American workers that are supported by foreign direct investment in the United States,” warned Nancy McLernon, head of the Organization for International Investment, on Tuesday.

“This is a misguided approach that could have a freezing effect on attracting global employers and will damage U.S. competitiveness.”

Nancy McLernon, Head, Organization for International Investment

The Washington D.C.-based trade group represents the interests of foreign firms in the United States, which it believes will be disadvantaged by the new rules.

“This is a misguided approach that could have a freezing effect on attracting global employers and will damage U.S. competitiveness, which may very well be measured in lost jobs, wages and GDP,” Ms. McLernon said in a statement.

If German chemicals giant BASF, for example, loans its U.S. subsidiary money for investments in the United States, such expenditures lower its U.S. taxable income under existing rules. According to the Organization for International Investment, the Treasury Department proposal may erode this tax advantage.

How much more expensive U.S. investments could become for German and other foreign companies remains unclear, however.

The United States has one of the highest corporate tax rates in the world at 35 percent in 2015. Germany’s, by comparison, was only 15 percent in 2015. But including the country’s solidarity surcharge for rebuilding eastern Germany and other taxes, the combined tax rate for corporations is approximately 30 to 33 percent, according to consulting firm Deloitte.

Given the disparity in corporate income tax rates throughout Europe, however, the European Union is fighting corporate tax dodgers as well. Ireland is among the member states that have sought to block efforts by the European Parliament and the European Commission to clamp down on corporate tax evasion.

U.S. political opposition to the merger between Pflizer and Botox-maker Allergan was not surprising, especially in a presidential election year.

Democratic presidential rivals Hillary Clinton and Bernie Sanders both took to Twitter on Wednesday to praise the regulation and the collapse of the merger.

“Glad to hear Pfizer is calling off the merger. We need to close the loopholes that let corporations escape paying their taxes,” Ms. Clinton said on Twitter.

Mr. Sanders tweeted that companies are “taking advantage of the benefits of America, yet refuse to accept their responsibilities as Americans.”

Republican presidential candidate Donald Trump has also been critical of tax inversions, blasting the Pfizer and Allergan deal as “disgusting.”

Pfizer chief Ian Read has called a stop to the merger. Source: DPA


There have been around two-dozen tax inversion mergers since 2011, according to the Treasury Department, while another 30 were being planned. Congress’ Joint Committee on Taxation, in a 2014 study, estimated the practice could reduce tax revenue by $20 billion between 2015 and 2024.

The Pfizer-Allergan tie-up, which had become a poster child for the controversial practice, would have created the world’s largest pharmaceutical company with $65 billion in annual revenues.

Pfizer chief executive Ian Read pitched the deal in November as a way to support its “continued investment in the United States” while positioning the company “on a more competitive footing within our industry.”

In announcing the termination of the merger on Wednesday, Mr. Read said Pfizer planned to “make a decision about whether to pursue a potential separation of our innovative and established businesses by no later than the end of 2016.”


Thomas Jahn is one of Handelsblatt’s New York correspondents. Bert-Friedrich Fröndhoff leads a team of reporters which covers the chemicals, healthcare and services industries at Handelsblatt. Garrett Hering, an editor at Handelsblatt Global Edition, contributed to this article. To contact the authors: and

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