By Caroline Humer and Ransdell Pierson

NEW YORK (Reuters) - U.S. drug maker Pfizer Inc agreed on Tuesday to terminate its $160 billion agreement to acquire Botox maker Allergan Plc, in a major victory to U.S. President Barack Obama's drive to stop tax-dodging corporate mergers.

The decision to end the biggest tax "inversion" ever attempted, which would have seen Pfizer slash its tax bill by redomiciling to Ireland where Allergan is registered, came a day after the U.S. Treasury unveiled new rules to curb inversions.

While these new rules did not name Pfizer and Allergan, one of their provisions targeted a specific feature of their merger; Allergan's previous history as a major acquirer of other companies. The subsequent demise of the deal allows Obama to claim a big win during his last year in office.

Earlier on Tuesday, Obama called global tax avoidance a "huge problem" and urged Congress to take action to stop U.S. companies from tax-avoiding corporate "inversions", which lower companies tax bills by redomiciling overseas.

"While the Treasury Department's actions will make it more difficult... to exploit this particular corporate inversions loophole, only Congress can close it for good," Obama said.

Pfizer and Allergan will announce the termination of their deal on Wednesday, a source familiar with the matter said, asking not to be identified ahead of any official statement. Pfizer and Allergan declined to comment.

Pfizer was concerned that any tweaks to salvage the inversion might have provoked new rules by the U.S. Treasury, and so was leaning earlier on Tuesday to end the deal, a source had earlier told Reuters.

Pfizer will have to pay Allergan up to $400 million for its expenses as a result of terminating the deal, according to their merger agreement.

Pfizer shares had ended trading in New York on Tuesday up 2 percent on hopes the company would walk away or renegotiate the deal in its favor. Allergan shares closed down 14.8 percent to their lowest level since October 2014.

Several U.S. presidential candidates, including Republican Donald Trump and Democrats Hillary Clinton and Bernie Sanders, have seized on the issue in their campaigns.

"We have so many companies leaving, it is disgraceful," Trump told reporters as he greeted voters in Waukesha, Wisconsin on Tuesday. Clinton and Sanders both expressed support for Treasury's plan.

Besides Pfizer-Allergan, other pending inversion deals that have not yet closed include the proposed $16.5 billion merger of Johnson Controls Inc with Ireland-based Tyco International Plc, Waste Connections Inc's $2.67 billion deal with Canada's Progressive Waste Solutions Ltd, and IHS Inc's $13 billion acquisition of London-based Markit Ltd.

In all these cases, the shares of the target companies fell only slightly. Johnson Controls and Tyco said they would respond after conducting a review of the new rules.

Waste Connections and Progressive Waste Solutions said they expected the rules would impact less than 3 percent of the combined adjusted free cash flow in their first year after the deal.

IHS and Markit said they believed the rules would not affect their adjusted effective tax rate guidance of a low to mid-twenties percentage range.





THREE-YEAR RULE

Under previous rules which still apply, Allergan shareholders needed to own at least 40 percent of the combined company for the two companies to enjoy the full tax benefits of an inversion, and more than 20 percent to have any inversion benefit at all.

But a new 'three-year-look-back rule' issued by the Treasury on Monday made this much harder for Allergan, and appeared to take aim directly at it because of how the company was put together.

The new rule does not allow stock accumulated through a foreign company's U.S. deals in the last three years to count towards the book value needed to meet the inversion threshold.

This weighed on Allergan heavily because of its significant deals in this timeframe. These include the $66 billion merger of Allergan and Actavis Plc, the $25 billion purchase of Forest Laboratories and the $5 billion takeover of Warner Chilcott.

"The serial acquisition portion of the regulations will cause Pfizer to be treated as an 'expatriated entity' (under the terms of its existing deal with Allergan)," Robert Willens, a corporate tax and accounting analyst, wrote in a note.

Story continues