United States

First Circuit Court affirms amended Puerto Rico AMT is unconstitutional


On Aug. 25, 2016, the 1st U.S. Circuit Court of Appeals affirmed a U.S. District Court decision holding that Puerto Rico’s corporate alternative minimum tax (AMT), as amended in May 2015, was unconstitutional, as it imposed an impermissible restriction on interstate commerce (under the dormant Commerce Clause).

Puerto Rico’s corporate AMT, as enacted, consists of two separate tax computations, the higher of which is compared to the corporation’s regular tax liability to determine if any AMT is actually owed. The first computation, not at issue, functions similar to the equivalent federal AMT. The second computation, and the subject of the case, is based on the value of goods and services sold or provided to the corporation by a related entity outside of Puerto Rico.

Prior to the 2015 amendment, the second AMT computation was designed to circumvent profit-shifting out of Puerto Rico through the use of related parties. In furtherance of this objective, the Puerto Rican government could, under the former rules, reduce the rate of this AMT if it found that the price paid between the related parties for the goods and services was at arm’s-length. The May 2015 amendment eliminated this option, and added significantly higher graduated rates (the top rate of 6.5 percent, in particular, was targeted specifically at Wal-Mart Puerto Rico, the plaintiff in the original case).

Before ruling on the constitutionality of the AMT itself, the circuit court had to determine if it had jurisdiction to hear the case. Generally, various statutes prohibit suits in federal court to enjoin the assessment or collection of any federal, state or territorial tax, with an exception if there is no ‘plain, speedy and efficient’ remedy available under state or territorial law if a tax is later held to be unconstitutional. The circuit court held that, given the unique fiscal crisis faced by Puerto Rico, as well as a 2015 law capping the payment of any judgment exceeding $20 million against Puerto Rico to $3 million a year, that a post-collection suit for refund would not constitute a plain, speedy and efficient remedy. The circuit court then proceeded to consider the actual merits of the case.

The circuit court analyzed the AMT under the Constitution’s dormant Commerce Clause, which precludes states from discriminating between transactions that do and do not cross state lines. As the AMT only applies to transactions between Puerto Rico and entities outside Puerto Rico, the circuit court quickly held that it did discriminate against interstate commerce. The circuit court next considered an exception to the dormant Commerce Clause, which allows a state to discriminate against interstate commerce if it is the only way to advance a legitimate government interest. Although the circuit court held that preventing improper profit-shifting is a legitimate interest of Puerto Rico, it also held that there were less discriminatory ways of accomplishing it than the AMT (for example, conducting a transfer pricing audit of the entity).

Although Puerto Rico may still appeal this ruling to the United States Supreme Court, corporate taxpayers with Puerto Rican tax liabilities should give consideration to whether or not they would have had a lesser tax liability in prior years without the imposition of the AMT. It may be advisable to file claims for refund sooner rather than later, especially given the government’s current fiscal crisis.


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