Chamber of Commerce|Fights IRS on Inversions

     AUSTIN, Texas (CN) — In a lawsuit against the Internal Revenue Service Business, the Chamber of Commerce claims an IRS rule against corporate inversions illegally bypassed Congress, “short-circuiting legislative debate over a hotly contested issue.”
     The Chamber of Commerce of the United States of America and the Texas Association of Business sued the IRS and the Department of the Treasury on Aug. 4 in Federal Court.
     The IRS announced its Multiple Acquisition Rule on April 4. The temporary rule “took effect immediately without a prior opportunity for notice and comment in order to stop otherwise lawful cross-border mergers of private companies that federal Executive Branch officers apparently do not want to occur,” the Chamber says in the lawsuit.
     The Treasury defines a corporate inversion as “a transaction in which a U.S.-parented multinational group changes its tax residence to reduce or avoid paying U.S. taxes.”
     Inversions have become a political issue as giant U.S. corporations increasingly declare themselves residents of Ireland or other lightly taxed countries, depriving the United States of billions of dollars in tax revenue.
     Congress in 2004 added a provision to the IRS Code, Section 7874, which disqualified inversions made for tax purposes only, if the foreign company’s shareholders do not keep a meaningful stake in the new foreign parent corporation. In other words, inversions were permitted when they involved genuine corporate mergers or acquisitions and were not merely paper transactions.
     Section 7874 created three categories of transactions in which a foreign corporation acquires the property of a U.S. corporation:
     – If shareholders of the U.S. corporation receive less than 60 percent of the foreign parent corporation’s stock in exchange for their stock in the U.S. corporation, the foreign corporation is treated as a “foreign corporation” and is not subject to U.S. taxes on income earned outside of the United States;
     – If the shareholders of the U.S. corporation receive at least 60 percent but less than 80 percent of the foreign corporation’s stock, the foreign corporation is considered a “surrogate foreign corporation” and is allowed certain tax benefits, but denied others;
     – If U.S. shareholders receive 80 percent or more of the foreign corporation’s stock in exchange for their stock in the U.S. corporation, the foreign corporation is treated as a “domestic corporation” that may be taxed on its and its subsidiaries’ worldwide income. This inversion is basically disregarded for U.S. tax purposes.
     The Chamber calls inversions a “symptom of the uncompetitive nature of U.S. corporate tax law.” It says the United States taxes corporate income earned through foreign subsidiaries at a much higher rate than other nations.
     “To remain competitive as a global company, a U.S.-based multinational corporation therefore can indefinitely defer the taxes they owe on profits of foreign subsidiaries by declining to repatriate those profits, or engage in an inversion. Inversions thus allow multinational corporations to bring more money earned abroad into the United States, leading to the creation of new American facilities and more American jobs, as well as increased profits for U.S. shareholders,” according to the complaint.
     Congress and the Obama administration have proposed legislation seeking to deter inversions that were allowed under Section 7874.
     In a 2014 speech on the economy, President Obama criticized U.S. corporations that engaged in inversions, saying they were “fleeing the country to get out of paying taxes.”
     “They’re declaring they’re based someplace else even though most of their operations are here. Some people are calling these companies ‘corporate deserters,'” the president said.
     “Now, the problem is this loophole they’re using in our tax laws is actually legal. It’s so simple and so lucrative, one corporate attorney said it’s almost like ‘the Holy Grail’ of tax avoidance schemes. My attitude is, I don’t care if it’s legal — it’s wrong.”
     The Chamber says executive branch officials initially acknowledged they had no authority to reject inversions that complied with Section 7874. But the president and the Treasury Department said in 2014 and 2015 they were looking at options and proposals to limit inversions.
     A proposed $160 billion merger in late 2015 between Pfizer and Allergan, which is incorporated in Ireland, apparently forced the Treasury into action.
     The merger would have yielded a new company in which Allergan shareholders owned 44 percent of the stock. Thus it would have been treated as a foreign corporation under Section 7874 and not subject to taxes on income earned outside of the United States.
     The IRS issued its rule on April 4 in reply to that merger proposal, the Chamber says. It says that the Multiple Acquisition Rule “disregards any stock issued by a foreign corporation in prior acquisitions of U.S. corporations occurring during the three years before the signing date of a pending acquisition. This rule applies even if those previous acquisitions were not part of a plan to avoid the framework of Section 7874.”
     The rule eliminated the tax benefits of the Pfizer-Allergan merger by targeting the fact that Allergan was the product of several acquisitions of U.S. corporations by a foreign corporation in the previous three years. Under the rule, Allergan shareholders would have been treated as if they owned less than 20 percent of the new corporation, instead of the 44 percent they would have actually owned. So the new corporation would have been subject to federal income tax.
     The day after the rule was issued, Pfizer and Allergan announced they had abandoned their planned merger.
     That same day, President Obama proclaimed in a speech that the new regulations on inversions were “something that I’ve been pushing for a long time.”
     The Chamber claims the IRS violated the Administrative Procedure Act because the rule “took effect immediately without a prior opportunity for notice and comment.”
     “The rule pretends that previous, bona fide acquisitions do not exist in order to change the tax treatment that would unambiguously apply to a later, unrelated transaction under Section 7874,” the complaint states.
     The Chamber and the Texas business group say their members have been injured by the Multiple Acquisition Rule.
     “Foreign corporations that acquired U.S. corporations in the past are disabled from successfully merging with other U.S. corporations in the future. Conversely, U.S.-based multinationals that were considering mergers with foreign corporations now face a far smaller pool of potential transaction partners. In both respects, the opportunities for successful corporate transactions have been severely curtailed,” the complaint states.
     Chamber of Commerce attorney Lily Fu Claffee said in a statement: “Treasury and the IRS rewrote the Internal Revenue Code and steamrolled over the Administrative Procedure Act, which requires that an agency provide interested parties with notice and an opportunity to comment before a rule becomes effective.”
     The IRS referred questions to the Department of the Treasury, which did not respond to an email request for comment Monday.
     The Chamber wants the Multiple Acquisition Rule set aside.
     Its many attorneys include Laura Jane Durfee with Jones Day and by Lily Fu Claffee, with the U.S. Chamber Litigation Center.

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