NEW YORK/WASHINGTON, Aug 4 (Reuters) - Two business groups sued the Obama administration on Thursday over a crackdown on U.S. companies that try to reduce their U.S. taxes by rebasing abroad in a process known as inversion.
The U.S. Chamber of Commerce and the Texas Association of Business filed a lawsuit in Texas federal court that said a regulation from the U.S. Treasury Department in April exceeded what the law allows the department to do.
The rule was aimed at mergers involving non-U.S. companies such as Ireland-based Allergan Plc that have increased their size through a series of acquisitions. The rule helped to scuttle what had been a planned $160 billion merger of Allergan and U.S. drugmaker Pfizer Inc.
“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 Tom Donohue said in a statement.
A Treasury spokeswoman declined to comment.
Lawyers with expertise in tax law have said that such a lawsuit would face an uphill battle against Treasury, which has a strong record in court.
An 1867 law called the Anti-Injunction Act says that in general no legal challenge can be brought against a tax until it is assessed, and the administration of President Barack Obama could argue that the law bars a suit for now.
The Chamber and the Texas Association of Business argue, though, that the Treasury Department and the Internal Revenue Service must still follow a different law, the Administrative Procedure Act (APA). That law spells out the process agencies must follow before they impose regulations.
According to the lawsuit, the Treasury rule violated the APA because Treasury lacked authority to act, its rule was arbitrary and capricious, and Treasury did not allow for public notice and comment.
Treasury unveiled a package of rules in April meant to discourage inversions, which typically involve a U.S. multinational buying a smaller company in a foreign country with lower corporate taxes and then rebasing there, if only on paper.
Inverting U.S. companies usually leave their core U.S. operations at home, transferring only their legal tax domicile to the home country of the acquired company. Popular destinations for the deals are Ireland, Britain and Canada.
Inversions have a firm legal basis. But Democratic lawmakers have criticized them for eroding the U.S. corporate tax base, which is already riddled with loopholes. Republicans have largely opposed new curbs on the deals.
Representative Kevin Brady, a Texas Republican, said in mid-April that Treasury appeared to have overstepped its authority.
The lawsuit challenges one specific regulation that imposed a three-year limit on foreign companies such as Allergan bulking up on U.S. assets to avoid the ownership thresholds for a later inversion.
In April, Treasury defended its regulation in a statement that said it was “not consistent with the purposes” of federal law to permit a foreign company to bulk up so quickly and then enter into another inversion.
Texas federal courts have been a friendly venue for groups suing the Obama administration. A judge there blocked the president’s proposed overhaul of immigration, and another Texas judge blocked a rule requiring employers to report when they seek assistance in countering union campaigns. (Reporting by David Morgan in Washington and David Ingram in New York; Editing by Kevin Drawbaugh and Grant McCool)