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Obama seeks executive ways to limit tax inversions

WASHINGTON — Aiming to sidestep a logjam in Congress, the Obama administration is looking for steps it could take on its own to prevent American companies from reincorporating overseas to shirk U.S. taxes, officials said Tuesday.

By Josh Lederman
The Associated Press

8/6/2014

WASHINGTON — Aiming to sidestep a logjam in Congress, the Obama administration is looking for steps it could take on its own to prevent American companies from reincorporating overseas to shirk U.S. taxes, officials said Tuesday.

President Barack Obama has denounced so-called tax inversions as unpatriotic and has urged Congress to stop them, in an election-year push that Democrats hope will appeal to middle-class voters who feel corporate America isn't paying its fair share.

Republicans and Democrats disagree about the best solution, rendering congressional action this year unlikely. But tinkering with inversion without going through Congress would open up Obama to charges he's unilaterally rewriting the tax code, just as House Republicans are already suing Obama for allegedly exceeding his authorities.

Last month, Treasury Secretary Jacob Lew said the administration had already examined its options and determined it didn't have the authority to address inversions administratively. "If we did, we would be doing more," Lew said.

On Tuesday, the Treasury Department said that legislation is the only way to address the problem fully but that since inversions are actively eroding the U.S. tax base, the administration would seek ways to provide a partial fix without requiring new laws from Congress.

"Treasury is reviewing a broad range of authorities for possible administrative actions that could limit the ability of companies to engage in inversions, as well as approaches that could meaningfully reduce the tax benefits after inversions take place," the department said in a statement.

In an inversion, a U.S. business merges with or is acquired by a foreign company in a country with a lower tax rate, allowing the company to lower its tax bill. Frequently the companies maintain their U.S. headquarters and operations, and the U.S. entity often maintains control of the company. Obama argues that amounts to companies attempting to choose which tax laws they want to follow — a luxury not granted to individual taxpayers.

"They're basically renouncing their citizenship and declaring that they're based somewhere else, just to avoid paying their fair share," Obama said recently.

Both parties generally agree that inversions are a problem that must be addressed, but they disagree on the causes and the solutions. While some Democrats push to make it harder for U.S. firms to reincorporate overseas, Republicans argue that Congress should lower the corporate tax rate so that businesses won't feel the need to leave the U.S.

At 35 percent, the United States has the highest corporate income tax rate in the industrialized world. The U.S. also taxes income that's earned overseas but brought back to the U.S.

Obama has said he supports changes in corporate tax law that would close loopholes like the one that allows for inversions but would also lower the corporate tax rate. Such a broad overhaul of the U.S. tax code has proven elusive for Congress, even more so now that the midterm elections are mere months away. In the absence of signs Congress will act soon on tax reform, Obama has called for lawmakers to move narrowly to close the inversion loophole. That, too, appears an elusive goal.

"Congressional Republicans often don't want to be in a position of angering the corporate interests that are so beneficial to their political campaigns," White House spokesman Josh Earnest said Tuesday.

Yet because inversions are allowed by current law, it's unclear whether Obama can do much on his own.

Administration officials did not offer details Tuesday about what possibilities were under consideration. But Senate Democrats prodding Obama to act have pointed to a paper published last week by Stephen Shay, Harvard Law School professor who was a Treasury official earlier in Obama's presidency.

Writing in the trade publication Tax Notes, Shay argued that the Treasury could move to weaken the benefits that make it enticing for companies to pursue inversions.

As an example, after a company reincorporates overseas, it typically shifts large amounts of debt from the foreign company to the U.S. subsidiary, which can then deduct that debt when it files taxes. Shay said Lew could use regulations to start treating that debt as equity, which can't be deducted.

"It would be an important first step toward treating companies that renounce America the same way we treat people who renounce America — as freeloaders who get cut off from other benefits," Sen. Elizabeth Warren, D-Mass., said last week on the Senate floor.

Tax inversions began attracting attention earlier this year when the drug company Pfizer made an unsuccessful attempt to take over AstraZeneca, a British company. The deal would have allowed Pfizer to incorporate in Britain, limiting its exposure to higher U.S. corporate tax rates. Nearly 50 U.S.-based companies have merged with or acquired foreign businesses over the past decade in inversions, according to the Congressional Research Service.

Reach Josh Lederman on Twitter at http://twitter.com/joshledermanAP

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