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Sept. 8 — The extent of any pending executive action to limit inversions remains uncertain despite Treasury Secretary Jacob J. Lew's pledge to decide soon.
He has yet to tip his hand on how the department could address the recent rise in tax-driven corporate mergers, aside from backing retroactive changes favored by congressional Democrats.
Debate around that and other options continues as potential administrative changes are considered along with legislative possibilities, though Senate Finance Committee Chairman Ron Wyden (D-Ore.) and ranking member Orrin Hatch (R-Utah) haven't found common ground to date.
Lew prefers legislation but didn't rule out a preemptive Treasury move, in remarks at a Tax Policy Center event hosted by the Urban Institute.
“It is imperative that lawmakers get this done,” he said. Lew encouraged lawmakers to enact comprehensive tax law changes that also include anti-inversion language, though he conceded that Congress could take too long.
“Given that, the Treasury Department is completing an evaluation of what we can do to make these deals less economically appealing, and we plan to make a decision in the very near future.”
Some analysts—including Stephen Shay, a Harvard Law School professor who previously worked as Treasury's deputy assistant secretary for international tax affairs—believe Lew has the authority to limit interest deductions for companies that complete inversions and their strategies to avoid U.S. taxes on foreign-earned income currently held abroad.
Taking such steps now is necessary to stanch the inversion trend, he said in a discussion that followed Lew's speech.
Shay and Steven Rosenthal, a senior fellow at the Tax Policy Center, urged Lew to take two steps in particular.
Treasury could use authority under Section 385 of the U.S. tax code to treat loans from a post-inversion foreign parent company to its U.S. operations as equity rather than debt, they said. Potential legislation from Sen. Charles Schumer (D-N.Y.) would lower the amount of deductible interest to 25 percent on debt an inverted company loans its U.S. operations and apply the change backward by 20 years, according to a draft of the not-yet-introduced measure.
“Doing so will be a deterrent for those considering an inversion as they'll no longer see that opportunity to avoid U.S. taxation, and it will deal with the retroactive problem, because you eliminate it prospectively,” Schumer said July 22 at a Senate Finance Committee hearing.
Hatch, who told reporters Sept. 8 that he remained unconvinced about possible rules changes, said he didn't expect to forge a compromise with Wyden during this month's shortened congressional session.
In a separate approach Shay and Rosenthal advocated for Treasury, the department could restrict the use of tax-deferred earnings parked overseas for loans to the new foreign parent under Section 956.
Both administrative actions would remove much of the inversion appeal, Rosenthal said.
“To me, it's a no-brainer,” Shay said.
Lew didn't discuss either option in his speech, in which he also reiterated an anti-inversion proposal in President Barack Obama's budget plan to make original shareholders of a foreign firm own at least 50 percent of the merged company instead of the current 20 percent threshold.
Several Democratic lawmakers have made similar proposals in legislation designed to serve as a stepping stone to bigger changes to tax law, a path preferred by others including Edward Kleinbard, a law professor at the University of Southern California. Formerly the Joint Committee on Taxation's chief of staff, he remains optimistic that immediate legislative action on inversions could be followed by rewriting corporate tax laws next year.
“It's appropriate to tackle the issues in that order, because inversions pose a fundamental threat to the fairness of the tax system as between different firms that economically are all based in the United States, but some of which have used artificial transactions to opt into a more generous and less-regulated tax environment,” Kleinbard told Bloomberg BNA after the Tax Policy Center event.
Echoing congressional Republicans, John Samuels, General Electric Co.’s vice president and senior tax counsel, said during the event that policy makers can best address inversions through a broad rewrite of the tax code that provides U.S. companies an environment more on par with their foreign competitors.
Samuels, who like Kleinbard is sanguine about major tax revisions in the next year or two, said executive actions from Treasury wouldn't survive legal challenges.
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