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 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.
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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)
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