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."