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Ireland is about to get a new biggest company, after Pfizer Inc. and Allergan Plc agreed to combine for a price that’s only a little smaller than the nation’s entire economy.

QuickTake Tax Inversion

Pfizer and Allergan on Monday announced plans to combine in a record $160 billion deal, creating a giant with products ranging from Viagra to Botox and a low-cost tax base on the edge of Western Europe. Dublin-based Allergan is buying its much larger partner, paving the way for the new company to reside in Ireland for tax purposes. Irish gross domestic product last year was about $200 billion. At yesterday’s closing prices, the combined market valuation of the two companies is $312 billion, data compiled by Bloomberg show.

“The lure of tax advantages from a Dublin head office has been a significant factor in driving this deal,” said John Colley, a professor at Warwick Business School, in central England, who studies large-scale mergers. “The threat of succumbing to U.S. tax rates has meant that Pfizer has been desperate for a deal outside the U.S.”

For decades, U.S. companies have been flooding to Ireland to take advantage of its 12.5 percent company tax rate. The U.S. rate is 35 percent. Pfizer, based in New York, already makes an ingredient for Viagra in Cork, in the south of the country, while Allergan produces Botox in Mayo, in the west. There’s little sign of a slowdown in investment in Ireland, even as European regulators probe the state’s tax arrangements with Apple Inc. and the government distances itself from tax-based transactions which don’t produce local jobs.

German Finance Minister Wolfgang Schaeuble referred to the deal in a speech to parliament in Berlin on Tuesday, saying that it underscores the need for governments to avoid eroding their tax base. The reason for Pfizer’s planned combination with Allergan is “obvious,” he said.

Tax Advantages

“We are not pushing for inversions,” Irish Finance Minister Michael Noonan told reporters in Brussels on Monday, referring to the controversial transaction meant to cut corporate tax rates. The agency charged with winning investment for Ireland “never promotes inversions. It’s a decision for the two companies.”

While Noonan said Allergan and Pfizer were plainly merging for “tax advantages,” the government has no problem with the deal as both companies had “substantial” operations in Ireland.

Pfizer employs 3,300 people in Ireland and has invested $7 billion in the country since 1969. Allergan employs over 1,000 people in Westport in County Mayo.

In all, 140,000 people are directly employed by over 700 U.S. companies in Ireland, a country of 4.6 million people, according to the American Chamber of Commerce in Ireland. Ireland is the biggest global location worldwide for U.S. foreign direct investment in the chemicals sector, which includes drugs, the organization said. Ireland’s pharmaceutical exports are the seventh largest in the world, according to IBEC, a Dublin-based group representing employers.

‘Double Irish’

Yet, not all such deals are welcome. Last year, Noonan said tax inversions by companies not backed by real activities in Ireland can add to a “negative perception” of the government’s tax strategy.

“I can understand Noonan’s apprehension,” said Alan McQuaid, an economist at Merrion Capital in Dublin. “The whole issue here brings more bad publicity on the country, as it is likely to further enhance the notion of Ireland as a tax-haven.”

Patrick Coveney, chief executive of Greencore Group Plc, the Irish food company that’s the biggest sandwich maker in the U.K., told state-owned RTE Radio in Dublin on Tuesday that Pfizer’s proposed deal builds on its and Allergan’s presence in Ireland.

“That being said, I do think the political environment in the U.S. right now is that a deal like this is going to be very emotive,” said Coveney. “I suspect it’s going to generate a level of heat that we wouldn’t have gone looking for” in Ireland.

Already, European antitrust officials are probing Apple’s tax dealings in Ireland, with Noonan saying a ruling will probably be made after Christmas. As criticism of Ireland grew, Noonan is phasing out a controversial loophole known as the “Double Irish,” introducing a new lower tax on intellectual property.

And the investment keeps coming. Last month, for example, Barcelona-based Grifols SA, Europe’s largest maker of blood-plasma products, said it would provide 140 jobs in Ireland, and Noonan said on Monday that the government would focus on increasing employment at the new operation formed by the Pfizer and Allergan merger.

“The U.S. doesn’t offer a competitive regime. We do,” said Fergal O’Brien, head of policy at IBEC. “It’s perfectly sensible to move to a better corporate tax environment.”

— With assistance by Arne Delfs

( Updates with comment from German finance minister in fifth paragraph. )