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

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

“Although it might seem esoteric, this action is a clear case offederal executive branch officers and agencies bypassing Congressand short-circuiting legislative debate over a hotly contestedissue by unilaterally imposing the administration's preferredpolicy,” the groups said in the complaint in federal court inAustin.

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

While the chamber is suing over the implications for mergerswith foreign companies, corporate treasurers are worried the IRS rule change will limittheir use of such tools as cash pool and intercompanyloans.

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

“We have continued to urge Congress to enact anti-inversionlegislation, which is the only way to solve this problem,” thedepartment said in a statement. “In the absence of congressionalaction, Treasury proposed regulations to eliminate tax benefits forcompanies that acquire multiple U.S. firms over a short period oftime.”

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

Pfizer Merger

The IRS rule change has already blown up the planned $160billion merger of Ireland-based Allergan Plc and New York-basedpharmaceutical giant Pfizer Inc. The two companies cited the policyshift as the reason they abandoned their acquisition plans the dayafter the new regulation took effect, scuttling a deal that wouldhave made the U.S. company a subsidiary of the Europeancorporation.

The same day that Allergan and Pfizer broke up, President BarackObama gave a speech praising the IRS for altering the treatment oftax inversions, according to the complaint. He said while suchtax-avoidance deals were legal, their legality was “exactly theproblem.” The new regulation, Obama said, “will make it moredifficult and less lucrative for companies to exploit thisparticular corporate inversions loophole.”

Congress has repeatedly refused to pass legislation Obama favorsto restrict inversions. Lawmakers have tightened the practice toweed out so-called “mail-box inversions” where the foreign entityis a shell company with no operations other than a rented mailboxin an overseas tax haven.

The Obama administration's attack on inversions shrinks the poolof U.S. companies available for acquisition by foreign firms aswell as limits the number of multinational corporations that canshop for deals in America, the trade groups claim. The TreasuryDepartment tried to evade federal rulemaking procedures by labelingthe change “temporary,” the groups complain, but certain featuresof 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 theformer inversion rules to apply.

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

Bloomberg

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