Allergan Plunges On U.S. Tax Inversion Move

(RTTNews) - Shares of Allergan plc. (AGN) plunged about 22% in late trading Monday after the U.S. Treasury announced new rules to curb corporate tax inversion that could complicate the company's takeover by drug giant Pfizer Inc. (PFE).

AGN closed Monday's trading at $277.55, up $9.46 or 3.53%. However, in the after-hours, the stock fell $60.55 or 21.82%.

PFE Closed Monday's trading at $30.72, up $0.68 or 2.26%. in the after-hours trading, the stock further gained $0.90 or 2.93%.

Allergan, which is run from New Jersey but has a legal domicile in Dublin, Ireland, last year agreed to merge with Pfizer Inc. in a $160 billion deal that would give New York-based Pfizer a foreign address and a lower tax rate.

Pfizer Inc. and Allergan said, "We are conducting a review of the U.S. Department of Treasury's actions announced today. Prior to completing the review, we won't speculate on any potential impact."

The U.S. Department of the Treasury and the Internal Revenue Service or IRS issued temporary and proposed regulations to further reduce the benefits of and limit the number of corporate tax inversions, including by addressing earnings stripping. By undertaking an inversion transaction, companies move their tax residence overseas to avoid U.S. taxes without making significant changes in their business operations. After an inversion, many of these companies continue to take advantage of the benefits of being based in the United States, while shifting a greater tax burden to other businesses and American families, the Treasury department said.

The Treasury noted that it is taking action to limit inversions by disregarding foreign parent stock attributable to recent inversions or acquisitions of U.S. companies. This will prevent a foreign company that acquires multiple American companies in stock-based transactions from using the resulting increase in size to avoid the current inversion thresholds for a subsequent U.S. acquisition.

The Treasury noted that it address earnings stripping by targeting transactions that generate large interest deductions by simply increasing related-party debt without financing new investment in the United States; allowing the IRS on audit to divide debt instruments into part debt and part equity, rather than the current system that generally treats them as wholly one or the other; facilitating improved due diligence and compliance by requiring certain large corporations to do up-front due diligence and documentation with respect to the characterization of related-party financial instruments as debt. If these requirements are not met, instruments will be treated as equity for tax purposes.