Business groups sue IRS over offshore tax rules

The U.S. Chamber of Commerce and the Texas Association of Business on Thursday filed a lawsuit challenging Treasury Department and Internal Revenue Service (IRS) rules aimed at curbing offshore tax deals.

“Treasury and the 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,” Chamber President and CEO Thomas Donohue said in a news release.

{mosads}In April, Treasury and the IRS released a package of guidance aimed at limiting “inversions” — transactions in which a U.S. company merges with a foreign business and then reincorporates the merged company overseas to lower its taxes. One part of this package was temporary rules aimed at limiting “serial inversions.” 

The Chamber and the Texas association allege that the serial inversions rule is unlawful under the Administrative Procedure Act. They asked that the rule be set aside.

They argued in their complaint that Treasury exceeded its authority by issuing the rules and that the rules were “an arbitrary and capricious abuse of discretion.” They also took issue with the fact that the rules took effect immediately and Treasury and the IRS didn’t give stakeholders a chance to comment on them.

The rules are “a clear case of federal Executive Branch officers and agencies bypassing Congress and short-circuiting legislative debate over a hotly contested issue by unilaterally imposing the Administration’s preferred policy result in violation of clear statutory limits,” the groups said.

The business groups said that the rules were proposed to stop the planned merger of U.S. pharmaceutical giant Pfizer and Irish-based Allergan. The $160 billion planned deal would have been the largest inversion to date and was called off shortly after the rules were released.

The rules have harmed members of the groups “who are business organizations committed to defending the business community and the free enterprise system in Texas and throughout the Nation from unlawful regulations,” the groups said.

The complaint argues that inversions occur because the U.S. has a high corporate tax rate and taxes U.S. corporations’ foreign earnings. Donohue said that Washington should address inversions through tax reform rather than by punishing companies.

“The real solution is tax reform lowers rates for all businesses, allowing American companies to compete globally and the United States to attract foreign investment,” he said.

The lawsuit was filed in federal court in Texas and names as defendants the IRS, Treasury, IRS Commissioner John Koskinen and Treasury Secretary Jack Lew.

A Treasury spokesperson said Thursday that the guidance “was based on strong policy interests and clear legal authority.”

“We will continue to defend these regulations, which will help slow the erosion of our corporate tax base,” the spokesperson said.

In April, White House press secretary Josh Earnest said that the guidance was not focused on any specific transaction.

When Treasury and the IRS released the serial inversions rules, they also released proposed rules aimed at limiting a tax avoidance strategy called “earnings stripping” used by companies that have inverted. The earnings stripping proposal — which is not at issue in the lawsuit, was subject to a comment period and has yet to be finalized — has also drawn criticism from business groups, who think it is too broad.