Chamber of Commerce Sues IRS over Rules Limiting Inversions

The U.S. Chamber of Commerce challenged an Internal Revenue Service rule change it claims improperly stymies the ability of U.S. companies to shift their headquarters overseas to shelter global profits from American tax collectors.

The Washington-based chamber and a Texas trade group sued the government Thursday, objecting to a policy the IRS implemented in April that they say wasn't made available for public comment first. The change makes it significantly less profitable for companies to merge with foreign partners to be considered foreign-based entities for U.S. tax purposes, a practice known as inversion.

“Although it might seem esoteric, this action is a clear case of federal executive branch officers and agencies bypassing Congress and short-circuiting legislative debate over a hotly contested issue by unilaterally imposing the administration's preferred policy,” the groups said in the complaint in federal court in Austin.

The new rule upends more than a decade of tax policy “in order to stop otherwise lawful cross-border mergers of private companies that federal executive branch officers apparently do not want to occur,” according to the chamber and the Texas Association of Business.

While the chamber is suing over the implications for mergers with foreign companies, corporate treasurers are worried the IRS rule change will limit their use of such tools as cash pool and intercompany loans.

The Treasury Department said it would defend its regulations, which the agency said was “based on strong policy interests and clear legal authority. ”

“We have continued to urge Congress to enact anti-inversion legislation, which is the only way to solve this problem,” the department said in a statement. “In the absence of congressional action, Treasury proposed regulations to eliminate tax benefits for companies that acquire multiple U.S. firms over a short period of time.”

The government has been tightening down on companies that use international addresses to avoid paying the U.S.'s 35 percent corporate income-tax rate, the highest in the developed world.

Pfizer Merger

The IRS rule change has already blown up the planned $160 billion merger of Ireland-based Allergan Plc and New York-based pharmaceutical giant Pfizer Inc. The two companies cited the policy shift as the reason they abandoned their acquisition plans the day after the new regulation took effect, scuttling a deal that would have made the U.S. company a subsidiary of the European corporation.

The same day that Allergan and Pfizer broke up, President Barack Obama gave a speech praising the IRS for altering the treatment of tax inversions, according to the complaint. He said while such tax-avoidance deals were legal, their legality was “exactly the problem.” The new regulation, Obama said, “will make it more difficult and less lucrative for companies to exploit this particular corporate inversions loophole.”

Congress has repeatedly refused to pass legislation Obama favors to restrict inversions. Lawmakers have tightened the practice to weed out so-called “mail-box inversions” where the foreign entity is a shell company with no operations other than a rented mailbox in an overseas tax haven.

The Obama administration's attack on inversions shrinks the pool of U.S. companies available for acquisition by foreign firms as well as limits the number of multinational corporations that can shop for deals in America, the trade groups claim. The Treasury Department tried to evade federal rulemaking procedures by labeling the change “temporary,” the groups complain, but certain features of the policy make it clear the change is intended to be permanent. They've asked the court to set aside the IRS policy to allow the former inversion rules to apply.

The case is Chamber of Commerce of the United States of America v. Internal Revenue Service, 1:16-944, U.S. District Court, Western District of Texas (Austin).

Bloomberg

Complete your profile to continue reading and get FREE access to Treasury & Risk, part of your ALM digital membership.

Your access to unlimited Treasury & Risk content isn’t changing.
Once you are an ALM digital member, you’ll receive:

Thought leadership on regulatory changes, economic trends, corporate success stories, and tactical solutions for treasurers, CFOs, risk managers, controllers, and other finance professionals
Informative weekly newsletter featuring news, analysis, real-world case studies, and other critical content
Educational webcasts, white papers, and ebooks from industry thought leaders
Critical coverage of the employee benefits and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor