Pfizer has terminated its agreement to takeover Irish Botox maker Allergan in a deal worth $160bn, after the US Department of Treasury announced its decision to bring an end to tax inversion agreements.

The decision comes two days after the treasury and the Internal Revenue Service announced temporary and proposed actions to limit inversions as well as action to address earnings stripping, a commonly used technique to minimise taxes after an inversion.

US Treasury Secretary Jacob Lew said: "Treasury has taken action twice to make it harder for companies to invert.

"These actions took away some of the economic benefits of inverting and helped slow the pace of these transactions, but we know companies will continue to seek new and creative ways to relocate their tax residence to avoid paying taxes here at home."

"We plan to make a decision about whether to pursue a potential separation of our innovative and established businesses by no later than the end of 2016."

The treasury said after an inversion, several companies continue to take advantage of the benefits of being based in the US, forcing a greater tax burden to other businesses and American families.

In an inversion, an American firm shifts its tax residence overseas, generally via a merger to avoid taxes.

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With respect to Pfizer-Allergan deal, the new company would have been located in Ireland, when compared to the US.

The companies mutually agreed to end the deal, announced in November 2015, for which shareholders of Allergan would have received 11.3 shares of the new firm for each of their existing shares.

As per the agreed terms, Pfizer will pay $150m for reimbursement of Allergan’s expenses associated with the transaction.

Pfizer chairman and CEO Ian Read said: "We plan to make a decision about whether to pursue a potential separation of our innovative and established businesses by no later than the end of 2016, consistent with our original timeframe for the decision prior to the announcement of the potential Allergan transaction."