The deal between the pharmaceutical giants is being structured as an "inversion." Under such deals, an U.S. firm merges with a foreign company in order to move its headquarters to a country with a lower tax rate.
In this case, Allergan, which is based in Dublin, is buying Pfizer and the combined company will operate from Ireland. The deal -- the largest inversion on record -- is expected to lower the combined company's tax rate from about 25 percent to 17 percent to 18 percent.
While inversion have been around for decades, they have become more common in recent years and drawn the ire of many in Congress. The Pfizer-Allergan deal is likely to re-ignite the debate about how best to curb the practice, which experts have said diverts billions in tax revenue from U.S. coffers.
"This only further underscores the arcane, anti-competitive nature of the U.S. tax code," Senate Finance Committee Chairman Orrin Hatch (R-Utah) said in a statement.
"Short of a tax overhaul that will make it easier for American companies to invest and create more jobs at home," he added, "Washington ought to work together to explore viable policy-driven, apolitical solutions that will effectively combat inversions."
Last year, the Obama administration unveiled a plan to crack down on such transactions by making them less profitable. The rules made it more difficult for firms to bring cash earned abroad back to the United States tax-free, dampening one of the major benefits of such deals.
The rules prompted some companies to reconsider planned deals. Drug maker AbbVie, for example, called off a deal to buy Shire, its Irish competitor, last year.
And last week, the Treasury Department announced new measures to address the issue. Under these rules, it would be harder for a U.S. company to move its headquarters to a country where it has little business.
"Our actions can only slow the pace of these transactions. Only legislation can decisively stop them," Treasury Secretary Jacob J. Lew said in a conference call last week. "There is only so much Treasury can do to prevent these tax-avoidance transactions."
Pfizer and Allergan were able to sidestep the Treasury Department's new rules by structuring their deal as a reverse-merger. Allergan is technically buying Pfizer even though it is a much smaller company, but Pfizer is expected to the lead the combined company.
"Treasury is trying to hold back the tide with a broom, but that is an unfair position into which to put Treasury. The U.S. Congress owns the tax code," said Edward D. Kleinbard, a law professor at the University of Southern California Gould School of Law, and former chief of staff of the U.S. Congress's Joint Committee on Taxation.
"What is going on here is a dereliction of duty by Congress, and Treasury is doing the best it can in an impossible situation."