Obama Administration Weighing Options to Curb Corporate Inversions

By Richard Rubin | August 6, 2014

The U.S. Treasury Department is examining unilateral actions to curb corporate inversions, reversing its position that only Congress has the authority to stop or slow the deals.

About three weeks after Secretary Jacob J. Lew said officials had scoured “obscure provisions” and determined that Treasury couldn’t act on its own, the department said yesterday it had begun exploring its options.

“Treasury is reviewing a broad range of authorities for possible administrative actions that could limit the ability of companies to engage in inversions,” the department said in a statement. Changes may include “approaches that could meaningfully reduce the tax benefits after inversions take place, to at least provide a partial fix.”

Treasury’s statement puts companies on notice for possible new rules, even as Lew continues to push for legislation. It also alters the prospects for at least eight U.S. companies with pending inversions as well as dozens of others that have carried out inversions and might become subject to limits on their U.S. operations.

The administration’s statement also complicates President Barack Obama’s effort to compel Congress to impose retroactive limits on the pending inversion transactions of companies such as Medtronic Inc., Mylan Inc. and AbbVie Inc. Part of the administration’s attempt to get Congress to move quickly on a contentious issue in an election year was based on the idea that there was no alternative.

Legal Address

In an inversion, a company moves its legal address outside the U.S. to lower its tax bill, typically by buying a smaller company.

The administration didn’t say when any changes would be announced or what they might be.

Options include reclassifying some companies’ debt as equity. That would limit their deductions against the U.S. income tax and thus limit their ability to shift earnings out of the U.S., a practice known as earnings stripping.

The administration could prevent companies from using offshore assets that haven’t been taxed by the U.S. to finance inversion deals. That would limit companies from accessing profits through inversions.

A Senate Democratic aide who has spoken with Treasury officials said Treasury is skeptical that it has much authority unless it is willing to be much more aggressive than usual. The aide spoke on condition of anonymity to discuss private conversations.

‘Long List’

Lew told the New York Times yesterday that officials are assembling a “very long list” of options to “change the economics of inversions” and that no final decisions have been made.

“If we have to wait for what is the likely period of time before business tax reform can be enacted,” Lew told the newspaper, “I think we’re all going to regret the number of inversions that have occurred in the interim.”

Linda Carlisle, a tax attorney at Miller & Chevalier in Washington, said she doesn’t expect Treasury to act tomorrow.

“I’m already worried because there is pending legislation with a retroactive effective date,” she said. “Am I more worried now? Perhaps. But I’m already worried.”

Obama administration officials, including Lew, have previously insisted that Congress must authorize changes in law to limit inversions.

“We do not believe we have the authority to address this inversion question through administrative action,” Lew said July 16. “If we did, we would be doing more.”

Congress Inaction

Congress has deadlocked on the issue and is on a break from Washington until September. In this election year, any movement on the issue looks unlikely, leaving the administration with a choice: press the political issue by pointing to inaction in Congress or attempt to address the problem by itself.

Democrats want retroactive limits to prevent U.S. companies from getting a foreign address by buying a smaller business. Republicans generally want to address the issue through a broader tax-code revamp that won’t occur until 2015 at the earliest.

“The discussion of possible administrative actions should not be an excuse for Congress to drag its feet on legislation,” Representative Sander Levin of Michigan, the top Democrat on the House Ways and Means Committee, said in a statement.

‘Long-Term Damage’

“Corporate inversions, as well as other tax avoidance strategies, threaten to cause long-term damage to the U.S. tax base and increase the tax burden on ordinary Americans — and swift collective action is required,” Levin said.

After Lew all but ruled out administrative action, former Treasury official Stephen Shay urged the administration to consider changes in a Tax Notes article last month. He focused not on barriers to inversion but on changes that would limit companies’ post-inversion transactions.

Shay, the former top international tax official at Treasury under Obama, has contended that Treasury has authority that it’s not using to make the deals less attractive.

In the Tax Notes article, Shay said the administration could limit inverted companies’ interest deductions against U.S. income or their ability to gain access to foreign cash without paying U.S. taxes.

A 2007 Treasury Department study found “strong evidence” that inverted companies engage in earnings stripping, using interest deductions and other maneuvers that aren’t available to domestic companies.

Less Attractive

Unlike the legislation backed by Obama, the changes suggested by Shay wouldn’t prevent inversions. Instead, they would make the transactions less attractive.

Nina Devlin, a spokeswoman for Canonsburg, Pennsylvania- based Mylan, said yesterday that she had no comment.

A spokeswoman for AbbVie, which has announced a tax- inversion deal though it hasn’t been completed, didn’t return a call and and e-mail seeking comment yesterday.

Walgreen Co., the biggest U.S. drugstore chain, plans to say it will buy all of Alliance Boots Holdings Ltd. and won’t use the deal to move its tax address abroad, said a person familiar with the matter.

“If Treasury has the authority to tackle inversions, by all means they ought to use it,” Senator Charles Schumer of New York, the chamber’s third-ranking Democrat, said in an e-mailed statement yesterday. “But we also need legislation to take on inversions to ensure that whatever Treasury is able to do can’t be undone by a future administration.”

–With assistance from Lisa Lerer and Kathleen Hunter in Washington and Drew Armstrong and Cynthia Koons in New York.

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