WASHINGTON (AP) — 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. But Republicans and Democrats disagree about the best solution, rendering congressional action this year unlikely.
Tinkering with inversions 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 examined the tax code and determined that without new laws, its options were limited.
“We do not believe we have the authority to address this inversion question through administrative action,” Lew said.
But on Tuesday, the Treasury Department said that while only legislation can fully fix the problem, the Obama administration was searching for ways to provide a partial fix, warning that corporate inversions are actively eroding the U.S. tax base.
“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 problematic, 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 a legislative overhaul that would close loopholes but also lower the corporate tax rate. Congress hasn’t been able to agree on such a broad revamp of the tax code. With that reality in mind, Obama has called for lawmakers to move narrowly to close the inversion loophole, but that, too, appears an elusive goal.
Yet it’s unclear whether Obama can do much on his own.
Administration officials did not offer details about what possibilities were under consideration. But Senate Democrats 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 weaken the benefits that entice 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,” said Sen. Elizabeth Warren, D-Mass., one of three Senate Democrats who sent a letter Tuesday to Obama urging him to take immediate executive action on inversions.
But Thomas Lys, who teaches corporate restructuring at Northwestern University’s Kellogg School of Management, said it wasn’t clear that Obama has the legal authority to deter inversions. “It’s a stretch of current regulations,” he said.
Obama’s move to curb inversions comes three months before the midterm elections, in which Democrats are seeking to portray themselves as aggressive advocates for the middle class while Republicans are accusing Obama of presidential overreach.
A spokesman for House Speaker John Boehner urged Obama on Tuesday to work with Congress on adding inversions rather than acting on his own, while the U.S. Chamber of Commerce warned that Obama’s actions could potentially make the situation worse.
“Congressional Republicans often don’t want to be in a position of angering the corporate interests that are so beneficial to their political campaigns,” said White House spokesman Josh Earnest.
Tax inversions began attracting attention earlier this year when the drug company Pfizer attempted unsuccessfully to take over AstraZeneca, a British company. Nearly 50 U.S.-based companies have merged with or acquired foreign businesses over the past decade in inversions, the Congressional Research Service said.