WASHINGTON President Barack Obama's proposed rules to stop U.S. companies from reincorporating abroad, if only on paper, to avoid U.S. income taxes appear to overstep legal authority, a top Republican lawmaker said on Friday.
Representative Kevin Brady said his staff is scrutinizing the rules, which were unveiled last week by the U.S. Treasury Department. Legal experts have offered mixed views on the viability of any court challenge.
The new rules, intended to discourage tax "inversions," led to the collapse of U.S. drugmaker Pfizer Inc's $160 billion acquisition of Ireland's Allergan Plc.
"We recognize there is broad discretion in some areas of that tax code," Brady, a Texas Republican and chairman of the tax-writing House of Representatives Ways and Means Committee, said in a speech to the U.S. Chamber of Commerce.
"But it certainly appears that Treasury overstepped its authority, especially in effect, taking legislative proposals that haven’t passed this Congress or any other Congress and essentially making it law through regulation."
Brady gave no indication of what his committee might do. It was unclear what action, if any, the Republican-controlled Congress would take against the inversion rules in an election year marked by voter anger over taxes and international trade.
"I share the concern about inversions. Everyone does. But there’s a right way and a wrong way to tackle them," Brady said.
An inversion is a tax-driven deal in which a U.S. company acquires a smaller, foreign business and adopts its tax domicile to reduce the combined company's overall tax burden. The deals most often involve reincorporating in Ireland or Britain.
Though inversions have been going since the 1980s, a new wave has been under way for about five years. The Pfizer-Allergan deal would have been the biggest inversion of all time.
There is bipartisan agreement on the need for comprehensive tax reform to address inversions, but the deeply divided Congress is unlikely to tackle this until 2017, especially with elections coming in November, analysts said.
In the interim, the Obama administration has tightened inversion rules in limited areas, drawing Republican criticism.
"The administration’s strategy won’t solve the fundamental problem and likely will make it worse," Brady said.
(Editing by Steve Orlofsky and Andrew Hay)