President Barack Obama commended the U.S. Treasury Department for putting rules in place aimed at limiting tax inversions, but ultimately called on Congress to definitively close the loopholes.
The new rules could impact New York-based Pfizer's planned acquisition of Allergan, based in Dublin. The companies said they are reviewing the rules, which would limit internal corporate borrowing that shifts profits out of the U.S.
Tax inversions occur when a U.S. company acquires a foreign company and moves their headquarters overseas to enjoy a lower tax rate. The deals have become increasingly common among pharmaceutical companies.
Allergan's stock dropped steeply Tuesday morning in pre-market trading in reaction to the new rules, while Pfizer's rose slightly. When the deal was struck late last year, Pfizer estimated the combined firm would drop its current tax rate of 25% to an adjusted rate between 17% and 18%.
Medtronic similarly moved from Minneapolis to Dublin when it bought Covidien for $42.9 billion in January 2015. An earlier deal between North Chicago, Ill.-based AbbVie and Dublin-based Shire didn't work out.
The president said the tax inversion process “sticks the rest of us with the tab, and makes working Americans feel like the deck is stacked against them.” Pfizer has rebuked these types of concerns, with CEO Ian Read emphasizing that, despite the shift in tax dollars, 85% of Allergan's business is in North America.
"We appreciate that the issues raised are important for the future competitors of the country and that many good minds are looking to reform the system, but the two parties are moving forward with the transaction," Read said in November.
Obama on Tuesday stressed that tax inversions aren't only an American issue, but a problem for many countries, and will require a global effort to tackle.
“There is doubt that the problem of global tax avoidance generally is a huge problem … one of the big problems we have is that a lot of this stuff is legal, not illegal,” Obama said. “Unless the U.S. and other countries lead by example in closing some of these loopholes and provisions, in many cases you can trace what's taking place, but you can't stop it.”
