Corporate lobby group the US Chamber of Commerce and the Texas Association of Business have filed a lawsuit against the US government, aimed at preventing the Obama administration’s proposed tax rule changes to make so-called corporate inversions more difficult.
The lawsuit, filed in US District Court for the Western District of Texas, is seen as escalating attempts by US companies to prevent the crackdown on tax inversions, which in April thwarted plans by US pharmaceutical group Pfizer for a US$160bn merger with Ireland’s Allergan and move its head office to Ireland. The move would have saved the group upwards of US$35bn in taxes, according to estimates.
There have been a series of mergers between US corporations and smaller foreign rivals, by which the former have been able to move their address to a lower tax jurisdiction outside the US. This enables them to reduce the amount of earnings subject to the federal corporate rate of up to 35%.
However, regulations issued by the US Treasury Department in April aimed to reduce the main benefits of an inversion. The new rules made it more difficult, for example, for companies to employ the practice known as “earnings stripping” that enables them to lower their taxable US profits.
Tom Donohue, president of the Chamber of Commerce, commented: “Treasury and the Internal Revenue Service [IRS] ignored the clear limits of a statute and simply rewrote the law unilaterally. 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. The real solution is tax reform that lowers rates for all businesses, allowing American companies to compete globally and the US to attract foreign investment.”
The Chamber’s chief legal officer, Lily Fu, claimed that the Treasury had “steamrollered over” a legal requirement giving interested parties an opportunity to comment on proposed new rules before their introduction.
A statement issued by the Treasury Department confirmed that it would have preferred Congress adopt legislation to stop inversions, but acted in the absence of congressional action. “This action was based on strong policy interests and clear legal authority,” the statement said. “We will continue to defend these regulations, which will help slow the erosion of our corporate tax base.”
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Government intervention means that new regulations pave the way for a competitive regulatory and tax regime.