Will Treasury play hardball with inversions?

The U.S. Treasury Department should use immediate stopgap regulations to make offshore transactions known as corporate inversions less lucrative, said the department’s former top international tax lawyer.

The administration can unilaterally limit inverted companies from taking interest deductions in the U.S. or from accessing their foreign cash without paying U.S. taxes, Stephen Shay said in an interview and in an article published today in Tax Notes.

“If you take away the incentives, a large portion of these deals would not happen because they are indeed tax-motivated,” said Shay, who left the Obama administration in 2011 and is now a professor at Harvard Law School.

Companies including Medtronic Inc. and AbbVie Inc. have pending inversion transactions in which they would purchase a smaller foreign company and then move the combined corporation’s legal address outside the U.S. In most cases, companies barely change their operations and don’t move their executives.

The administration has been pressing Congress for retroactive action to make it harder for companies to invert and insisting that Treasury can’t act on its own.

‘Doing More’

The administration has studied a lot of “obscure provisions” and has concluded it doesn’t “have the authority to address this inversion question through administrative action,” Treasury Secretary Jacob J. Lew said on CNBC July 16. “If we did, we would be doing more.”

There doesn’t seem to be administration support for unilateral action, Henrietta Treyz of Height Securities LLC wrote in a note to clients today.

“It is not clear that the administration would attempt what Shay is describing,” she wrote.

Congress is deadlocked on the issue and is set to leave Washington late this week for a five-week recess.

“Our tax system should not reward U.S. companies for giving up their U.S. citizenship, and unless we tackle this problem, these transactions will continue,” Lew said in an article in the Washington Post published yesterday. “I call on Congress to close this loophole and pass anti-inversion legislation as soon as possible.”

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