The Obama administration will decide “in the very near future” whether it should exercise its regulatory authority to make corporate inversions less economically attractive, US. Treasury Secretary Jacob Lew said on Sept. 8.
Speaking at the Urban Institute in Washington, Lew said that the best way to address tax inversions is through comprehensive tax reform that includes specific anti-inversion provisions.
Nevertheless, he said the Obama administration is “clear-eyed” about the possibility that Congress may not be able to move quickly on inversions, and, as a result, Treasury is exploring ways to act that are clearly within Treasury’s authority, he said.
Lew said that any exercise of the administration’s regulatory authority would only effect “part of the economics,” that make inversions attractive, so legislative action would still be needed. “It is imperative that lawmakers get this done,” he said.
Harvard Law Professor Stephen Shay said tax inversions provide an opportunity to insert intercompany debt into a US company, thereby reducing US tax liability through interest deductions. Similar maneuvers can be achieved through use of royalties from intangibles, he said.
Shay said that section 385(b) of the tax code clearly gives Treasury authority to issue regulations to reclassify debt as equity and thereby transform a deductible interest payment into a nondeductible dividend in cases where a company has inverted. Shay said that while, in a perfect world, any change to debt-equity rules would be applied to all foreign parent groups, rather than just inverted companies, the immediate need to stop inversion transactions outweighs those concerns.
Shay said that the IRS could use existing section 956 anti abuse regulations to treat a “hopscotch loan” from a controlled foreign subsidiary to the new foreign parent as a deemed dividend to the US company, in many cases.
There is still a real need for further regulations to stop post-inversion planning techniques that allow companies to use earnings from foreign subsidiaries that have had the benefit of deferral without triggering a deemed repatriation. One such technique involves inverting and then decontrolling a company, he said, though many other taxpayer opportunities exist to lower effective tax rates post-inversion.
John M. Samuels, Senior Counsel of Tax Policy & Planning at General Electric Co. said he did not think regulations addressing inversions would be effective. “The transactions would just morph into another form,” he said. He also questioned Treasury’s authority to issue regulations and said that if Treasury did act, it would antagonize Congress, making tax reform less likely. Inversions should be addressed in comprehensive tax reform, Samuels said.
