Pfizer's Allergan bid defies Obama's tougher tax rules
Pfizer's bid for $113bn Dublin-based drug maker Allergan is the biggest merger of the year, anywhere. It's potentially good news for the Irish exchequer, which may gain a massive new taxpayer, and for businesses here like Arthur Cox, Allergan's adviser on Irish corporate law.
But a deal that may well see the biggest drugs group in the world end up based here, adding to Ireland's corporate tax take at the expense of its old home in the US, is already provoking a backlash in Washington.
The very fact of the Pfizer approach blows a massive hole in President Barack Obama's efforts to shut a loophole that has seen his country lose some of its biggest taxpayers to Ireland and other low-tax nations.
The issue set off a massive hullabaloo in Washington DC in the summer of 2014, prompting new rules that looked like the end for tax inversions - the foreign takeover deals that for decades have allowed US corporations to transfer their tax residence overnight to low-tax regimes including Ireland, the UK and Bermuda.
President Obama tightened up his country's tax rules and accused big US corporations of playing "the system" by "magically becoming Irish" through so-called tax inversion deals.
Inevitably, when low corporation tax is a issue, he singled Ireland out - something that added to the pressure on the Government here to shut loopholes like the so-called "double Irish".
Despite the best efforts of politicians like President Obama, the process of inverting - buying a foreign company and reversing into its low tax structures - is massively popular with American shareholders.
It usually involves a US company buying a smaller foreign rival and then relocating its corporate headquarters - including its global tax domicile - to the foreign company's home address. On paper anyway.
Post inversion, the US firm will still be charged 35pc tax on US profits, but global earnings qualify for the inevitably lower tax regime abroad even if, as is often the case, the operational headquarters doesn't budge an inch.
Pfizer's approach for Dublin-based Allergan is a classic example - and crucially won't be blocked even under the new stricter US rules brought in last year.
Pfizer will be able to shift its global tax based to Ireland by buying Allergan because the Botox-maker is more than 25pc of the size of its buyer. That means the deal is a genuine merger in global terms.
The backlash is under way even before the bid talks get as far as naming a price. Democratic front-runner for the US election Hillary Clinton is among those who have come out against the plans.
"Clinton is committed to cracking down on so-called 'inversions,' where a company chooses to leave the US on paper to game the tax system, and believes we should reform our tax code to encourage investment in the US, rather than shipping earnings and jobs overseas," Clinton spokesman Ian Sams said.
"When corporations choose to invert and don't pay their fair share of taxes, they leave the rest of us to pick up the tab. That isn't right," Democratic Senator Richard Durbin said in a statement.
Senator Durbin has voiced similar views on prior inversions, including one that was abandoned by retailer Walgreen.
A US Treasury Department spokesperson said further actions could be taken, but stressed that only Congress can slam the door completely.
With an election under way that won't be the end of it. But, whatever politicians say, Pfizer can bank on there being little chance of legislation to block its deal until at least the 2016 presidential election.
Nearer term some options, such as cracking down on companies' ability to shift income, as opposed to domicile to low-tax countries could take some of the benefit out of inversions.
Ultimately, as long as the US tax rate of 35pc is the highest in the developed world business will do what they can to keep as much global income as possible out of the jurisdiction. (Additional reporting Reuters)