The U.S. Chamber of Commerce and the Texas Association of Business filed a lawsuit in federal court Thursday against the Treasury Department, accusing the Internal Revenue Service (IRS) of exceeding its legal authority in instituting a new rule which aims to prevent corporate inversions for the purpose of tax avoidance.
The regulation in question, known as the Multiple Acquisition Rule, went into effect April 8 and essentially amends section 7874 of the Internal Revenue Code which requires more than 40 percent of a merged company’s stock be owned by the shareholders of the acquired, foreign entity, in order for a U.S. corporation not be liable to pay domestic taxes.
The new Treasury rule stipulates that a foreign entity’s U.S. acquisitions do not count toward the 40 percent threshold if purchased within three years of the merger in order to prevent overseas companies from purchasing American assets in order to satisfy the shareholder minimum. U.S.-based corporations invert by buying smaller companies in countries with lower business taxes to avoid paying the 35 percent federal rate — currently the highest in the developed world.
Plaintiffs, however, argue that the Obama Administration implemented the new rule without congressional approval, citing the Administrative Procedure Act which states that federal agencies to first be granted authority through legislative action, and then to give public notice of an amended regulation and allow for public comment.
“Treasury and the IRS ignored the clear limits of a statute, and simply rewrote the law unilaterally,” Thomas Donahue, president and CEO of the Chamber of Commerce said in a statement. “This is not the way government is supposed to work in America.”
“Instead of breaking the rules to punish companies engaged in lawful transactions, Washington should just do its job and comprehensively reform the tax code,” Donohue continued. “The real solution is tax reform that lowers rates for all businesses, allowing American companies to compete globally and the United States to attract foreign investment.”
Treasury countered with a statement of its own, claiming that it indeed does have the authority to implement the Acquisition Rule, which is further justified as the result of a lack of relevant legislation, “which is the only way to solve this problem.”
U.S. corporations began the practice of inversion circa 1983, and since then the Treasury has occasionally written new rules to try and eliminate some of the tax benefits.
The Republican-controlled Congress favors lowering the corporate tax-rate and limiting exemptions, but has refused to work with the current administration to limit inversions alone. Instead, legislation has been passed in recent years to curtail “mail box inversions”, where U.S. businesses set up umbrella companies in foreign “tax shelter” countries with a new mailing address and no infrastructure.
The last notable, legitimate inversions occurred in 2014 and 2015, when Burger King, Medtronic and Mylan Inc. bought smaller companies and moved their headquarters to the acquired firms’ home countries of Canada, Ireland and the Netherlands.
Earlier in 2016, a $160 billion deal to merge U.S.-based pharmaceutical company Pfizer Inc. and Ireland’s Allergan PLC was nixed after Treasury’s Acquisition Rule was implemented.
On the day the Pfizer’s inversion was cancelled, President Obama acknowledged the legality of the transaction, but said it’s legitimacy was “exactly the problem,” and that the new rule “will make it more difficult and less lucrative for companies to exploit this particular corporate inversions loophole.”
The lawsuit, Chamber of Commerce of the United States of America, et al. v. Internal Revenue Service, et al., was filed in U.S. District Court for the Western District of Texas in Austin.
[Reuters] [Bloomberg] [Photo courtesy Dave Granlund via thebryancrabtreeshow.com]