| WASHINGTON, July 28
WASHINGTON, July 28 President Barack Obama could
act without congressional approval to limit a key incentive for
U.S. corporations to move their tax domiciles abroad in
so-called "inversion" deals, a former senior U.S. Treasury
Department official said on Monday.
By invoking a 1969 tax law, Obama could bypass congressional
gridlock and restrict foreign tax-domiciled U.S companies from
using inter-company loans and interest deductions to cut their
U.S. tax bills, said Stephen Shay, former deputy assistant
Treasury secretary for international tax affairs in the Obama
administration. He also served as international tax counsel at
Treasury from 1982 to 1987 in the Reagan administration.
In an article being published on Monday in Tax Notes, a
journal for tax lawyers and accountants, Shay said the federal
government needs to move quickly to respond to a recent surge in
inversion deals that threatens the U.S. corporate tax base.
"People should not dawdle," said Shay, now a professor at
Harvard Law School, in an interview on Friday about his article.
If the administration were to take the steps he discusses,
Shay said, some of the many inversion deals that are said to be
in the works might be halted in their tracks.
The regulatory power conferred by the tax code section he
has in mind, known as Section 385, is "extraordinarily broad"
and would be a "slam dunk" for the Treasury Department, he said.
A recent sharp upswing in inversion deals is causing alarm
in Washington, with Obama last week urging lawmakers to act soon
on anti-inversion proposals from him and other Democrats. But
Republican opposition has blocked Congress from moving ahead.
Meantime, investment bankers and tax lawyers are
aggressively promoting inversion deals among corporate clients,
with U.S. drugstore chain Walgreen Co one of several
companies known to be evaluating such a transaction.
Medical technology group Medtronic Inc, based in
Minnesota, and drug maker AbbVie Inc, of Illinois, are
in the midst of inverting to Ireland by buying smaller Irish
rivals and shifting their tax domiciles to that country.
The biggest attraction of inversions for U.S. multinationals
is putting their foreign profits out of the reach of the U.S.
Internal Revenue Service. But another incentive is to make it
easier to do so-called "earnings stripping" transactions.
This legal strategy involves making loans from a foreign
parent to a U.S. unit, which can then deduct the interest
payments from its U.S. taxable income. Plus, the foreign parent
can book interest income at its home country's lower tax rate.
Section 385 empowers the Treasury secretary to set standards
for when a financial instrument should be treated as debt,
eligible for interest deductibility, and when it should be
treated as ineligible equity.
If a corporation has loaded debt into a U.S. unit beyond a
certain level, Section 385 could be used by the government to
declare the excess as equity and ineligible for deductions.
"The stuff I'm describing should be putting a crimp in
tax-motivated deals," Shay said.
(Editing by Eric Walsh)