Two business groups have sued the Obama administration over the government’s crackdown on U.S. companies moving abroad to reduce their tax burden. The process is known as a corporate inversion. Also called a tax inversion, a corporate inversion is the practice of a corporation relocating its legal domicile to a nation with lower taxes like Ireland, Britain and Canada, while retaining its material operations in its higher-tax country of origin.
Such a process is legal, but has drawn criticism from some politicians who say U.S. companies engaged in corporate inversions are avoiding their tax obligations. Inverting U.S. companies usually leave their core U.S. operations intact domestically, but transfer their legal tax domiciles abroad to the country of the acquired company.
In April, the U.S. Treasury Department unveiled a package of rules intended to discourage inversions, and were specifically aimed at transactions involving non-U.S. companies. In creating these new rules, the U.S. Treasury Department stated that the corporate inversion process is “not consistent with the purposes” of federal law because it allows “a foreign company to bulk up” on U.S. assets and then enter into another inversion.
The new rules stopped Ireland-based Allergan Plc, which has grown through a series of acquisitions, from completing a planned $160 billion combination with Pfizer – the largest inversion ever attempted. Allergan and Pfizer are not parties to the lawsuit though both are either directly or indirectly associated with the Texas Association of Business.
The recently-filed matter by the U.S. Chamber of Commerce and the Texas Association of Business in Texas federal court is the first in the nation to claim that a recent regulation promulgated by the U.S. Treasury Department exceeded the Department’s authority and, essentially, re-wrote the law.
According to the lawsuit, the claimants alleged that the U.S. Treasury Department’s regulatory scheme violated the Administrative Procedure Act because it lacked authority to act, its rules were arbitrary and capricious, and the Treasury did not permit public notice and comment. Specifically, the claimants are challenging a three-year limit on foreign companies from acquiring U.S. assets in an attempt to avoid ownership thresholds for a subsequent inversion.
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