New Tax Rules on Inversion Deals Are Met With Protest

Pfizer, Allergan and others criticize restrictions aimed at limiting companies’ ability to move tax address overseas

A day after the Obama administration limited the ability of U.S. companies to do international deals to lighten their tax burdens, Pfizer Inc. and Allergan PLC terminated their planned $150 billion merger and other companies around the globe raced to assess the impact of the new rules.

The new Treasury Department rules—the third such attempt to rein in a spate of so-called tax-inversion deals—drew swift condemnation from Allergan Chief Executive Brent Saunders, who criticized them as “un-American” and “capricious.”

“The rules are focused on the wrong thing: Our government should be focused on making America competitive on a global stage, not building a wall locking companies into an uncompetitive tax situation,” Mr. Saunders said in an interview.

In an Op-Ed written for The Wall Street Journal appearing in Thursday’s newspaper, Pfizer CEO Ian Read wrote that U.S. pharmaceutical companies “compete in a global marketplace at a real disadvantage” to rivals with lower tax burdens. “While the Treasury’s proposal is a shot at Pfizer and Allergan, this unilateral action will hurt other companies as well,” he wrote.

The rules are aimed at making it more difficult for companies to move their tax addresses out of the U.S. and its 35% corporate tax rate and then shift profits to low-tax companies using a maneuver known as earnings stripping.

The action drew howls of protest from corporate boardrooms and conservative critics.

Some foreign companies with ordinary U.S. businesses worried they would be swept up by the rules. Nancy McLernon, president of the Organization for International Investment, a nonprofit that represents the U.S. operations of foreign-based companies, said the proposal would put at risk the jobs of 12 million American workers.

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

A spokesman for Swiss food giant Nestlé SA delivered a similar message.

U.S.-based companies with large global operations like General Electric Co. and Honeywell International Inc. don’t appear to be affected by the proposed rules. Still, the rules raised concerns among analysts about tougher tax treatment of foreign earnings.

A day after the Obama administration limited the ability of U.S. companies to do international deals to lighten their tax burdens, Pfizer Inc. and Allergan PLC terminated their planned $150 billion merger and other companies around the globe raced to assess the impact of the new rules.

The rules are aimed at making it more difficult for companies to move their tax addresses out of the U.S. and its 35% corporate tax rate and then shift profits to low-tax companies using a maneuver known as earnings stripping.
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The action drew howls of protest from corporate boardrooms and conservative critics.

Some foreign companies with ordinary U.S. businesses worried they would be swept up by the rules. Nancy McLernon, president of the Organization for International Investment, a nonprofit that represents the U.S. operations of foreign-based companies, said the proposal would put at risk the jobs of 12 million American workers.

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

A spokesman for Swiss food giant Nestlé SA delivered a similar message, though he said the draft regulations wouldn’t affect Nestlé’s current investment and employment in the U.S. “As a major investor and employer in the U.S.A., we are concerned that those new regulations intended to curb ‘inversions’ by U.S. companies could have substantial impact on good-faith foreign-based groups’ creation of jobs and investments in the U.S.,” the spokesman said.

U.S.-based companies with large global operations like General Electric Co. and Honeywell International Inc. don’t appear to be affected by the proposed rules. Still, the rules raised concerns among analysts about tougher tax treatment of foreign earnings.

Merck & Co. Chief Executive Kenneth Frazier said in an interview Wednesday the new Treasury rules will make tax inversions less attractive for companies to pursue. But he predicts “you’ll still see iconic American companies moving their headquarters overseas or being acquired by foreign companies” because the Treasury changes don’t address the underlying reason that companies pursue inversions: a U.S. tax structure that he says puts American companies at a competitive disadvantage to rivals like Switzerland’s Novartis AG that have lower effective tax rates.

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