To Stop Tax Inversions, Obama Could Dust Off Old Law

The President doesn't need Congress' help to thwart tax inversions, ex-Treasury official says.
Iris DorbianJuly 30, 2014

President Obama is wasting time calling on Congress to squash corporate tax inversions when he could simply enforce an old law, according to a former senior U.S. Treasury Department official, Reuters reports.

Former Treasury official Steven Shay

Former Treasury official Steven Shay

Internal Revenue Code Section 385 allows the Treasury Department to “restrict foreign tax-domiciled U.S companies from using inter-company loans and interest deductions to cut their U.S. tax bills,” notes Steven Shay, a former deputy assistant Treasury secretary for international tax affairs in the Obama administration, in an article published Monday in trade journal Tax Notes, as reported by Reuters.

If a U.S. company has excessive debt, the tax law, enacted in 1969, could be invoked to declare the liability as “equity and ineligible for deductions,” explains Shay, who also served as international tax counsel at Treasury from 1982 to 1987 in the Reagan administration.

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Shay writes that the tax law is the perfect remedy to derail the exodus of U.S. companies from seeking tax-friendly sanctuaries abroad. But to maximize its effectiveness, President Obama needs to act quickly and not “dawdle.”

The directive is especially urgent as companies like pharmaceutical giant AbbVie seek to reincorporate in the United Kingdom and medical-technology firm Medtronic to Ireland after their respective acquisitions of smaller Irish companies close. Even drug retailer Walgreens is supposedly weighing a tax inversion after announcing plans to acquire Swiss-based Alliance Boots.

Shay’s advice to President Obama comes at a time when the protests in Washington over tax-inversion deals are reaching a crescendo. Fueling the controversy are investment bankers and tax lawyers who are endorsing these deals.

Source: Obama could curb corporate ‘inversions’ on his own: ex-U.S. official

Photo: Harvard Law School

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