(Bloomberg) The White House traded accusations of unpatriotic behavior with the CEO of a major drugmaker after unexpectedly tough new rules from the U.S. Treasury Department on corporate inversions derailed a $160 billion merger between Pfizer Inc. and Allergan Plc.
The timing and severity of the new rules, issued Monday, took both companies and even many members of Congress by surprise. By the time the merger’s end was announced less than 48 hours later, surprise had given way to harsh words.
“The concern we have is the leaders of some corporations who are looking to take the best of America without making a contribution to the success of our country,” Josh Earnest, the White House press secretary, said on Wednesday. “That’s wrong.”
Earnest’s remarks came after Allergan CEO Brent Saunders said during an interview on CNBC Wednesday morning that it was “un-American” to change the rules after the two drug companies had structured their planned deal. He also said he thought U.S. officials had specifically targeted the Pfizer-Allergan deal.
“We followed the rules Congress had set,” Saunders told CNBC’s David Faber. “But, for rules to be changed is a bit un-American, but that’s the situation we’re in.” He also said he believed U.S. Treasury officials specifically targeted the Pfizer-Allergan merger with the rule, which he said blindsided both companies.
Later, Earnest said: “I think it is difficult to have a lot of patience for an American CEO trying to execute a complicated financial transaction to avoid paying taxes in America talking about what it means to be a good citizen of the United States.” Allergan, which is operated from Parsippany, New Jersey, has a Dublin tax address.
‘Serial Inverters’
The surprise rule that ended the Pfizer-Allergan merger is designed to curb what Treasury Secretary Jack Lew called “serial inverters”—foreign companies that have linked up repeatedly with U.S. companies that then shifted their tax addresses overseas.
Under federal law, for a company that results from a cross-border merger to be considered a foreign taxpayer, the foreign company must be at least one-fourth the size of the U.S. one. Treasury’s proposed rule tightens that restriction by saying that if a foreign company has bulked up through previous mergers with U.S. companies in the last three years, as Allergan has, that additional bulk isn’t counted toward the size requirement. The rule is currently a proposal—meaning the agency will take public comment on it before issuing it in final form.
“These rules, this three-year look back was designed, I think, very specifically to target this deal,” Saunders said on CNBC Wednesday. “I don’t believe, based on an initial review, it impacts any other deal and virtually any other circumstance.” Treasury officials have said the rules weren’t aimed at any particular transaction.
Surprise Move
The end of the planned Pfizer-Allergan merger reignited discussion of Treasury’s surprise move Monday. Officials kept the new rules under wraps until almost the last minute. House Democratic staff members weren’t briefed on the 5 p.m. announcement until after 4 p.m. on Monday, said a Democratic aide.
House Republicans weren’t notified until 4:42 p.m., a senior House Republican aide said.
Democratic Senator Chuck Schumer of New York said Wednesday he knew “a little bit” about what Treasury was planning. Illinois Senator Dick Durbin, the chamber’s second-ranking Democrat, said he talked to Lew personally about the change. “They didn’t give me any details” at the time, he said.
Republican Orrin Hatch, the chairman of the Senate Finance Committee, said “not really” when asked if he’d been given notice of the new rule.
Regarding the collapse of the Pfizer-Allergan deal, Hatch said: “I don’t think companies should be intimidated by government. On the other hand, yeah, I’m glad to see Pfizer stay here, and I’m going to try and find a way whereby we can do this legitimately so they’ll want to stay here and they’ll be treated fairly. That’s my goal.”
Republicans, including Hatch, have called for addressing inversions in the context of a broader tax overhaul; those plans have yet to gain traction. Senate Majority Leader Mitch McConnell said this week the chances of broad tax legislation this year were “ slim to none.”
Portman’s Push
Ohio Senator Rob Portman, who has been leading the charge for action among Senate Republicans, said Wednesday he wants McConnell to change course and act this year on a corporate tax overhaul along the lines of an outline he and Schumer agreed to last year.
Portman said that instead of inversions, foreign companies could still end up taking over U.S. companies, noting a buying spree by Shire PLC of Ireland after its proposed deal with AbbVie Inc. was foiled by earlier Treasury rules targeting inversions.
"You could argue that it makes it more likely they’ll be snapped up because—as in the case of Shire—they can’t do mergers, but they can turn around and buy U.S. companies at a premium because our tax code is still not competitive," Portman said.
Portman, who is facing a tough re-election battle, said it would be "too late" for many companies to wait until the next president to act.
"It takes us a while to get anything done around here and we have the planets aligned on this one to a certain extent," he said. "We have the administration generally understanding what we have to do. We have Chuck Schumer and me agreeing on a framework."
Congressional Inaction
Earnest said Wednesday the administration has acted because lawmakers haven’t.
“We can’t get Republicans in Congress to understand the significance of their failure to act,” he said.
Since September 2014, Treasury has proposed three sets of rules. Some of its earlier provisions, which made it harder for companies to undertake inversions and their tax benefits, became “temporary regulations” this week, meaning they’re in effect for three years. The rule that stymied the Pfizer-Allergan deal is still just a proposed regulation. Treasury will accept public comment on it before it’s issued in final form.
