Reference no: EM132800376

Question - In November 2015, pharmaceutical companies Pfizer and Allergan formally announced a $160 billion mergerthe largest medical merger in history-creating a company with a combined stock market valuation of over $300 billion. It was by no means a merger of equals. Pfizer, based in New York with assets of more than $170 billion, produces some of the most well known drugs in the U.S. market, including Lipitor (a cholesterol drug), Zithromax (an antiobiotic), and Celebrex (an anti-inflammatory drug). Allergan, based in Dublin, Ireland, has a valuation of one-third of that of Pfizer, and is most well known for its Botox drug. What, then, made the deal so attractive? Pfizer had already attempted to buy the British pharmaceutical giant AstraZeneca in 2014 but had been turned away over a disagreement over valuation. The decision to switch to Allergan was a clear indication that the interest was not in any strategic synergy or new drug combinations under development. The deal was about reducing Pfizer's tax bill. By merging with an overseas company, and basically giving up its U.S. citizenship, Pfizer could reduce its tax bill to an estimated 18 percent. While the combined federal and state corporate income tax rates in the United States can be as high as 35 percent, as compared to an average of 25 percent in Europe, detailed tax strategies usually enable U.S. corporations to reduce their domestic tax bill significantly. Merging with, or buying, an overseas corporation and changing your tax home or "domicile" allows a further reduction in the tax rate. However, this process of "corporate inversion" is even more devious. Being domiciled overseas would allow Pfizer to access global profits that were being kept overseas to avoid payment of U.S. taxes on those earnings. The potential savings of $35 billion explained the company's eagerness to find a willing suitor. Pfizer was not alone in recognizing the potential savings of such corporate inversions. In 2014, the American fast-food chain Burger King acquired the Canadian coffee and donut chain Tim Horton's, moving its corporate domicile to Ontario with a maximum corporate tax rate of only 26.5 percent. In April 2016, the U.S. Treasury Department announced a rule change targeted at closing the "corporate inversion" loophole that President Barack Obama had labeled "insidious" and "unpatriotic." Pfizer announced shortly afterward that the planned merger with Allergan would no longer take place, and that the company would book a charge of $150 million to compensate Allergan "for reimbursement of expenses associated with the transaction." The chief executive of Allergan, Brent Saunders, voiced his frustration with the decision, stating that the U.S. Treasury was "building a wall around the U.S. to keep people in." With several other multibillion-dollar inversion deals still in negotiation from such companies as CocaCola Co. and Johnson Controls, it seems likely that there will be aggressive lobbying to change the new rules.

Required -

1. Does the higher U.S. corporate tax rate provide sufficient justification for these inversion deals? Why or why not?

2. Proponents of such deals claim that they are simply maximizing profits and shareholder value. Does that make them ethical? Explain your answer.

3. Why did the U.S. Treasury introduce a rule change?

4. Do you think the change will hold, or will lobbyists succeed in getting the rule reversed? Explain your answer.