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Obama Confirms Search For Inversion Solutions

by Mike Godfrey,, Washington

11 August 2014

While Democrats in Congress continue to seek a legislative solution to the 'corporate inversion problem' after the summer recess, United States President Barack Obama has confirmed his intention in the meantime to act quickly by utilizing his administrative regulatory powers.

Answering questions at a press conference after the US-Africa Leaders Summit, Obama confirmed that he is looking to take whatever measures he can, while awaiting congressional action, to reduce tax benefits for inversions.

He said: "We don't want companies who have up until now been playing by the rules suddenly looking over their shoulder and saying, you know what, some of our competitors are gaming the system and we need to do it, too. That kind of herd mentality I think is something we want to avoid. So we want to move quickly – as quickly as possible."

"My preference would always be for us to go ahead and get something done in Congress... So there is legislation working its way through Congress that would eliminate some of these tax loopholes entirely. And it's true what Treasury Secretary Lew previously said, that we can't solve the entire problem administratively. But what we are doing is examining: Are there elements to how existing statutes are interpreted by rule or by regulation or tradition or practice that can at least discourage some of the folks who may be trying to take advantage of this loophole?"

Democrats, seeking a bipartisan package of measures in the Senate, have put forward proposals that have concentrated on increasing the minimum foreign shareholding cap to require that at least 50 percent of a US company's shares are held by the foreign company's shareholders after a merger, up from 20 percent currently, in order for the combined entity to be allowed to move away from America's 35 percent corporate income tax rate.

There have also been proposals to include more stringent rules governing the deduction of interest expense and the inclusion of management and control provisions in a new definition of an inverted company.

On the other hand, Republican lawmakers' preference continues to be to expedite comprehensive tax reform, to lower the corporate tax rate and to introduce a more internationally competitive tax code. Although concerned by a spate of inversions, they believe that the proposed short-term fixes would be "punitive" and could have unintended consequences.

The efforts of Senate Finance Committee Chairman Ron Wyden (D – Oregon), to "build a bipartisan coalition to pursue immediate legislation to stop the inversion virus," therefore, look set to be thwarted.

Corporate tax reform is the only "right choice," according to the House of Representatives Speaker, John Boehner (R – Ohio), who recently asked the President not to use his executive powers unilaterally in an op-ed in Politico. "Such a move sounds politically appealing," he wrote, "but anything truly effective would exceed his executive authority. The president cannot simply re-write the tax code himself."

TAGS: compliance | Finance | tax | tax compliance | law | corporation tax | legislation | United States | tax breaks | tax reform | regulation

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