The Lure of Inversion


As Seen in CFO Studio Magazine Q1/Q2 2016 Issue 

The Lure of InversionScreenshot (40)

In November, Pfizer and Allergan agreed to a $160 billion merger — the largest pharmaceuticals merger (and the largest acquisition) in history. Bloomberg Businessweek reports that the transaction technically permits smaller Dublin-based Allergan to buy the much larger New York–based Pfizer. This technical legal maneuver will allow the newly formed drug behemoth called Pfizer Plc to relocate its tax address to Ireland. Ireland’s corporate income is taxed at a rate that is less than half that in the U.S. This controversial maneuvering is called inversion, and is becoming an increasingly popular option being considered by large pharmaceutical companies, and those in other industries, throughout America.

At 35 percent, the business tax rate in the U.S. is the highest in the world. Ireland’s tax rate is 12.5 percent. However, qualifying for an inversion is not that simple, and the scrutiny is fierce. A company must join with a foreign partner that is at least 25 percent of its size. The U.S. Department of the Treasury is targeting such deals by reducing tax benefits and limiting companies’ ability to transfer operations to new foreign parents without paying U.S. taxes.

Changes in the corporate tax laws may come on the heels of the 2016 elections. As such, companies considering inversion deals are scrambling to find willing foreign counterparts. Any reform Congress makes to discourage inversion could take effect as early as 2017.

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