On March 28, 2016, the U.S. District Court for the District of Puerto Rico struck down certain provisions of the alternate minimum tax ("the AMT") of the Puerto Rico Internal Revenue Code of 2011, as amended (the "Code"), which imposed special taxes on businesses in Puerto Rico based on transactions made with affiliates located outside of Puerto Rico. The AMT would impose a tax ranging between 2.5% and 6% on purchases of personal property from affiliates. The AMT would also impose a 20% tax on expenses for services received from affiliates. This type of tax, known as transfer pricing tax, is commonly used to force multinational corporations to set arm's length prices on transactions between affiliated entities.
In Wal-Mart Puerto Rico, Inc. v. Juan C. Zaragoza-Gómez, No. 3:15-CV-03018 JAF (P.R. Dist. Mar. 28, 2016), Wal-Mart argued that the transfer pricing tax imposed by the Code is unconstitutional because it discriminates between interstate transactions, which the United States Supreme Court has held violates the dormant Commerce Clause of the Constitution of the United States of America. The Court held that the transfer pricing tax, on its face, clearly discriminates against interstate commerce since the tax only applies to "multistate corporations and their local affiliates."
The Court also held that the transfer pricing tax only applies to "cross-border transactions with their out-of-state home office or related company." As an example, the Court stated that if every state and territory in the United States enacted the transfer pricing tax, "multistate companies and conglomerates would be burdened exclusively." Finally, the Court also held that the transfer pricing tax violates the Federal Relations Act and the Equal Protections Clause of the U.S. Constitution for the same reasons that it violated the dormant Commerce Clause. As such, the Court held that the transfer pricing tax is unconstitutional.
As a result of the Court's ruling, an injunction went into effect immediately that prohibits the Puerto Rico Treasury Department from levying, collecting or enforcing the transfer pricing tax. The Governor of Puerto Rico, the Honorable Alejandro García Padilla, has already stated to the local press that the Commonwealth of Puerto Rico will appeal the Court's decision to the U.S. Court of Appeals for the First Circuit. However, until the U.S. Court of Appeals issues a determination on the Commonwealth's appeal, taxpayers subject to the transfer pricing tax will not be required to make such payments.
