Bloomberg News

Lew Explores U.S. Inversion Limits He Dismissed in July

August 06, 2014

The U.S. Treasury Department is examining unilateral actions to curb corporate inversions, reversing its position that only Congress has the authority to stop or slow the deals.

About three weeks after Secretary Jacob J. Lew said officials had scoured “obscure provisions” and determined that Treasury couldn’t act on its own, the department said yesterday it had begun exploring its options. In an inversion, a company moves its legal address outside the U.S. to lower its tax bill, typically by buying a smaller company.

“Treasury is reviewing a broad range of authorities for possible administrative actions that could limit the ability of companies to engage in inversions,” the department said in a statement. Changes may include “approaches that could meaningfully reduce the tax benefits after inversions take place, to at least provide a partial fix.”

How U.S. Companies Buy Tax Breaks

Treasury’s statement puts companies on notice for possible new rules, even as Lew continues to push for legislation. It also alters the prospects for at least eight U.S. companies with pending inversions as well as dozens of others that have carried out the transactions and might become subject to limits on their American operations.

The administration’s statement complicates President Barack Obama’s effort to compel Congress to impose retroactive limits on the pending inversions by companies such as Medtronic Inc. (MDT:US), Mylan Inc. (MYL:US) and AbbVie Inc. (ABBV:US) Part of the administration’s attempt to get Congress to move quickly on a contentious issue in an election year was based on the idea that there was no alternative.

Administration’s Options

The administration didn’t say when any changes would be announced or what they might be.

Options include reclassifying some companies’ debt as equity. That would limit their deductions against the U.S. income tax and thus limit their ability to shift earnings out of the U.S., a practice known as earnings stripping.

The administration could prevent companies from using offshore assets that haven’t been taxed by the U.S. to finance inversion deals. That would limit the companies from accessing profits through inversions.

A Senate Democratic aide who has spoken with Treasury officials said the department is skeptical that it has much authority unless it’s willing to be much more aggressive than usual. The aide spoke on condition of anonymity to discuss private conversations.

‘Long List’

Lew told the New York Times yesterday that officials are assembling a “very long list” of options to “change the economics of inversions” and that no final decisions have been made.

“If we have to wait for what is the likely period of time before business tax reform can be enacted,” Lew told the newspaper, “I think we’re all going to regret the number of inversions that have occurred in the interim.”

Linda Carlisle, a tax attorney at Miller & Chevalier in Washington, said she doesn’t expect Treasury to act tomorrow.

“I’m already worried because there is pending legislation with a retroactive effective date,” she said. “Am I more worried now? Perhaps. But I’m already worried.”

Obama administration officials, including Lew, have previously insisted that Congress must authorize changes in law to limit inversions.

Treasury ‘Limits’

“We do not believe we have the authority to address this inversion question through administrative action,” Lew said on July 16, adding that there are “limits” to what Treasury can do without legislation. “If we did, we would be doing more.”

Congress is deadlocked on the issue and is on a break from Washington until September. In this election year, any movement on the issue looks unlikely, leaving the administration with a choice: press the political issue by pointing to inaction in Congress or attempt to address the problem by itself.

Democrats want retroactive limits to prevent U.S. companies from getting a foreign address by buying a smaller business. Republicans generally want to address the issue through a broader tax-code revamp that won’t occur until 2015 at the earliest.

“The discussion of possible administrative actions should not be an excuse for Congress to drag its feet on legislation,” Representative Sander Levin of Michigan, the top Democrat on the House Ways and Means Committee, said in a statement.

‘Long-Term Damage’

“Corporate inversions, as well as other tax-avoidance strategies, threaten to cause long-term damage to the U.S. tax base and increase the tax burden on ordinary Americans -- and swift collective action is required,” Levin said.

After Lew all but ruled out administrative action, former Treasury official Stephen Shay urged the administration to consider changes, in a Tax Notes article last month. He focused not on barriers to inversion but on changes that would limit companies’ post-inversion transactions.

Shay, the former top international tax official at Treasury under Obama, has contended that the department has authority that it’s not using to make the deals less attractive.

In the Tax Notes article, Shay said the administration could limit inverted companies’ interest deductions against U.S. income or their ability to gain access to foreign cash without paying U.S. taxes.

Earnings Stripping

A 2007 Treasury Department study found “strong evidence” that inverted companies engage in earnings stripping, using interest deductions and other maneuvers that aren’t available to domestic companies.

Unlike the legislation backed by Obama, the changes suggested by Shay wouldn’t prevent inversions. Instead, they would make the transactions less attractive.

Nina Devlin, a spokeswoman for Canonsburg, Pennsylvania-based Mylan, said yesterday she had no comment.

A spokeswoman for AbbVie, which has announced a tax-inversion deal though it hasn’t been completed, didn’t return a call and e-mail seeking comment yesterday.

Walgreen Co. (WAG:US), the biggest U.S. drugstore chain, said today it would keep its Deerfield, Illinois, address while buying all of Alliance Boots Holdings Ltd., the U.K.’s biggest pharmacy chain.

In the company’s statement, Chief Executive Officer Gregory Wasson said the board “could not arrive at a structure that provided the company and our board with the requisite level of confidence that a transaction of this significance would need to withstand extensive IRS review and scrutiny.”

Second-ranking Senate Democrat Dick Durbin of Illinois said he spoke today with Wasson. “It’s the right decision” for taxpayers in Illinois and the U.S., Durbin said in a statement.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editors responsible for this story: Jodi Schneider at jschneider50@bloomberg.net Laurie Asseo, Mark McQuillan


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Companies Mentioned

  • MDT
    (Medtronic Inc)
    • $74.62 USD
    • -0.01
    • -0.01%
  • MYL
    (Mylan Inc/PA)
    • $57.51 USD
    • 0.68
    • 1.18%
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