White House’ s efforts to deter tax inversion deals saw the US drugs giant Pfizer abandon its $160 billion pursuit of botox maker Allergan on Wednesday the 6th of April. The collapse of the deal brought the total level of abandoned deals this year to its highest since the eve of the financial crisis, peaking at more than $375 bn, and sent shockwaves through corporate America. The decision to terminate the largest tax inversion deal in history marks a watershed success for an interventionist US government and left the US pharmaceutical company struggling to redirect its strategy.


Starting from the beginning, it is fundamental to understand what a tax inversion deal represents. Briefly speaking, it is a piece of financial engineering that multinational companies, particularly from the US, have turned to in order to reduce their tax bill. In a tax inversion, one company buys a rival based in a different country with a less onerous tax policy. It then “reincorporates” by shifting the fiscal address of its headquarters to the country with the lighter tax burden. In many cases the operational HQ of the main business might remain in the original nation, but the firm simply holds some of its board meetings in the new jurisdiction. Furthermore, it may seem interesting to appreciate the motivations, which drive this policy in the United States. The main reason is that the corporation tax regime in the US is the most burdensome among developed economies. Indeed, American firms are subjected to a taxation at up to 39% of their domestic earnings, and also on income repatriated from foreign subsidiaries. On the contrary, most other countries impose much a lower rate than US on repatriated earnings. Consequently, this system has led American firms to stash an estimated $2tn overseas rather than repatriate the money.

Up to now, it has been discussed the theory behind this practice. However, it may be fascinating to cite at least some example of firms, which adopted it. On top of them, it cannot be neglected Burger King. More in details, the American fast food chain have avoided at least $150 million in taxes up to now, according to a recent estimate conducted by BDO, after the completion in 2015 of buyout of the Canadian coffee-and-doughnuts chain Tim Hortons. After this acquisition President Obama defined Burger King as a “corporate deserter” characterised by an “unpatriotic” spirit. Finally, Mr Obama did not just talk  but it acted to defeat tax avoidance definitely. The abrupt end of Pfizer’s turbulent three-year hunt for a deal to escape the US tax authorities came as a government action left another large deal in doubt. The US Department of Justice sued to block Halliburton’s proposed $25bn takeover of rival oil service group Baker Hughes.

Pfizer, the company behind Viagra and Xanax, was seeking to escape the US’s high corporate tax rate by shifting its address to low-tax Ireland where Allergan is domiciled, but the Treasury’s plans aim to wipe out the benefits that “abusive” inverters are seeking. They delivered a crushing blow to Ian Read, Pfizer’s chief executive. Several Pfizer investors questioned how he could have misjudged the mood in Washington, saying that he had become increasingly confident of the deal’s prospects in recent weeks. As a natural implication, he resigned on Thursday the 7th of April, after announcing the failure of the merger.


On Wednesday, the drugmaker said that it would now decide by the end of this year whether to split off its “established products” division, which sells generic medicines, and its “innovative” patent-protected medicines unit. Pfizer stood to escape US taxes on more than $128 billion of profits stored abroad. The pharmaceutical giant, which had agreed to pay a breach fee of up to$400 million, will pay $150m to cover Allergan’s deal-related expenses. In addition, challenging the ruling in the courts would have implied an unbearable level of uncertainty for shareholders, who were convinced that Obama administration was ready to do everything to block this specific deal.

Technically speaking, under the new Treasury rules, when calculating the size of the foreign acquirer, any assets acquired  from a US company within three years of the signing date of the latest acquisition must be ignored, therefore, limiting fiscal advantages derived from cross-border activities substantially.

The Pfizer-Allergan merger was structured so that Pfizer shareholders would have hold about 56 percent of the resulting company, below the 60 percent threshold that would have restricted benefits of the inversion under the old rules. Interestingly, this was possible only because Allergan had been enlarged by a string of serial inversions. In 2013, US-based Actavis bought Ireland-headquartered Warner Chilcott, paving the way for the company to relocate its tax base away from the US and leading to aggressive acquisitions that culminated in the takeover of Allergan. Under the new rules, Pfizer shareholders would end up owning about 80 percent of the combined firm, triggering the 60 percent threshold. In that time, the group attempted a failed takeover of the UK’s Astrazeneca as well as considered deals for Canada’s Valeant and UK’s GlaxoSmithKline.


In conclusion, some crucial insights emerge. First of all, corporate tax avoidance represents a huge issue worldwide, as testified by many controversies concerning Google, too. These possibilities of arbitrage may be solved through a more strict collaboration among the wealthiest countries in the world. Second observation, connected with the first one: the case described above presents a pseudo-illegal exploitation of a more favourable tax regime of another country. However, conversely to the recent private tax avoidance scandal in Panama, this case involved an American firm trying to exploit an EU-member corporate tax rate. Obviously, this may be seen as a hint of  the existence of  fiscal heavens much closer to us than Panama, for instance the Netherlands, the UK and Ireland. Thirdly, it should be highlighted how risky such an operation may be. Cross-border activities should be based always on economic efficiency based on strategic considerations rather than on tax savings. Otherwise, all the positive results might be rapidly eliminated by a targeted  government policy. Last but not least, in a world where an increasingly decisive role is covered by corporate social responsibility and responsible business, this practice triggers some doubts regarding its legitimacy and morality.

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