The Obama administration is exploring a variety of options in the tax code in an attempt to discourage companies from reincorporating overseas for tax purposes otherwise known as 'inversion'.
Each possible weapon the administration is considering has its own pros and cons, with no decision having been made thus far. Meanwhile, lawyers and bankers are rushing to prepare for the sweeping changes that may be implemented.
The President announced his intentions Wednesday, amidst a recent surge in inversion deals beginning in 2008. At least 15 companies since 2013 have announced plans to purchase a foreign company and then change its headquarters to a country with a lower rate.
For months, the Obama administration believed they had little power in regard to influencing inversions until a former administration official and Harvard Law School Professor, Stephen Shay, wrote an article for Tax Notes, outlining how the administration could alter the tax code to "take the juice out of the corporation expatriations."
"I just started asking the question, 'What could be done with regulation rather than legislation,' said Mr. Shay. His thoughts quickly gained the attention of Washington officials.
Shay suggested the Treasury set its sights on the tax code, particularly Section 385 to create a new tax regulation that would limit the amount of debt a company could hold and use for tax deductions, Section 163(j) to remove companies' ability to use interest payments to offset taxable income, and Section 7874, which some experts say gives the Treasury broad authority to intervene in inversions.
Source: Farrell, Maureen, "Obama Explores Tax-Code Weapons in Inversion-Merger Fight," The Wall Street Journal, August 8th, 2014