United States

Puerto Rico: U.S. Court of Appeals Affirms Decision Enjoining the Commonwealth from Enforcing the Alternative Minimum Tax

Sep 12, 2016
From KPMG TaxWatch

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On August 24, 2016, the U.S. Court of Appeals for the First Circuit affirmed a district court decision granting Wal-Mart Puerto Rico’s request for a permanent injunction against the Commonwealth’s enforcement of its recently amended corporate alternative minimum tax (AMT). The amended AMT is computed under two bases; the base at issue here is the sum of a tax of 20 percent on the services provided to the Puerto Rican taxpayer by a related party or home office outside the Commonwealth plus a graduated tax (at a rate of 6.75 percent for Wal-Mart) on tangible property sold or transferred to the Puerto Rico taxpayer by a related party or home office. The amendments to the AMT increased Wal-Mart’s tax by about $30 million per year. Wal-Mart brought an action in federal district court in Puerto Rico seeking an injunction to prevent enforcement of the amended AMT on the basis that the law violated the dormant Commerce Clause, among other things. The district court found that it had jurisdiction over the matter and enjoined enforcement of the tax.

On appeal, the court first addressed whether the Puerto Rico federal district court had jurisdiction over the case. If a plain, speedy, and efficient remedy was available in the Commonwealth courts, then the federal district court would have been barred from exercising jurisdiction. Calling this the “most difficult” question at issue, the court observed that legislation enacted in response to the Puerto Rico government’s fiscal situation capped the payment of judgments in excess of $20 million against the Commonwealth at $3 million dollar per year. The Commonwealth had discretion to not honor the $3 million amount if there were no funds available in a given year. As such, the court concluded that Puerto Rico “has now hamstrung its courts so as to deprive Wal-Mart Puerto Rico of a plain, speedy, and efficient remedy at the time of this suit.” The court also addressed—and concluded—that the enactment of PROMESA, a federal law granting a stay in bondholders and creditors claims against the Commonwealth, did not affect the outcome of this case. Finally, the court addressed the merits of the lower court’s decision and affirmed that the AMT statute was facially discriminatory, as it taxes only cross border transactions between a Puerto Rico corporate taxpayer and a home office or related entity outside of Puerto Rico. Although Puerto Rico had a legitimate state interest in preventing artificial profit-shifting by multistate corporations, the court determined that there were nondiscriminatory alternatives to advance this state interest, such as unitary combined reporting or transfer pricing adjustments. Having identified these less restrictive alternatives, the appeals court concluded that the AMT was a facially discriminatory law that could not survive a strict scrutiny analysis. Please contact Rolando Lopez at 787-756-6020 with questions.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.