Executive Order on Way to Nix Corporate Inversions & Retroactive?

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With Congressional action appearing unlikely, a number of lawmakers have urged the White House to use its executive authority to curb corporate inversions. The issue has been gaining traction over the past few weeks, and while the Administration has expressed a preference for Congress to address the issue, an Administration spokesman has indicated that nothing has been ruled out at this point. This article examines current events surrounding corporate inversions and a potential path that the Administration could take if it decides to act on its own.

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Calls for action. Last month, Treasury Secretary Jacob Lew sent an identical letter to Rep. Levin, Rep. Dave Camp (R-MI), Sen. Ron Wyden (D-OR), and Sen. Orrin Hatch (R-UT), in which he described corporate inversions as “hollow[ing] out the U.S. corporate income tax base.”

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Shortly thereafter, in a July 24 Treasury blog post, Assistant Secretary for Tax Policy Mark Mazur wrote about the “quite common” practice of making tax provisions retroactive, referring to the above letter. He provided examples of provisions where “backdated implementation” was “important to ensure that companies do not take advantage of the lengthy legislative process to rush through transactions exploiting the loopholes they know they are about to lose.”.

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On August 5, during a press briefing, White House Press Secretary Josh Earnest was questioned about whether the President would use executive action to stop corporate inversions. Although he declined to say with any certainty whether the President would take any unilateral action, he said that “it is our view that Congress should take the necessary step to address this loophole.” (See LINK ) Reports indicate that the Treasury is actively exploring options that the Administration could take. Rep. Levin, in response, has said that “the discussion of possible administrative actions should not be an excuse for Congress to drag its feet.”

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Possible avenue. According to a former Treasury official, one way that the Administration could unilaterally curb corporate inversions pending Congressional action would be to exercise its authority under Code Sec. 385, which authorizes IRS to prescribe regs to determine whether an interest in a corporation is debt or equity. Harvard professor Stephen Shay claims that, under that section, the Administration could limit the ability of inverted companies to take interest deductions in the U.S. or access their foreign cash without first paying U.S. taxes (i.e., the U.S. tax due upon “repatriating” foreign-earned income). According to Shay, by reclassifying debt as equity, a formerly deductible interest payment would be reclassified as a dividend for which no deduction may be claimed—resulting in a greater portion of income being taxable at U.S. corporate rates.

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