Obama may act on tax inversions without waiting for agreement from Congress

Law from 1969 could be used to tackle issue, says Harvard Law School professor

Talk to any Irish lawyer facilitating these so-called corporate tax inversion deals – involving US multinationals shifting their tax address to Ireland through overseas acquisitions – and they will tell you the biggest threat to this roaring business for Ireland is the US Congress reaching agreement on legislation that would close a tax loophole President Obama described as "unpatriotic" last week.

As long as the US charges companies at a top rate of 35 per cent on corporate profits made on global income, multinationals will continue to look at moving their tax headquarters overseas to places such as Ireland where they can file tax returns at 12.5 per cent rate.

Some may discount the prospect of a bitterly divided Congress passing any kind of tax reform given that Democrats want a new law immediately to halt the acceleration in inversions, while Republicans want a go-slow approach fearing it might weaken US firms.

The Democratic Bill on the table, which is being backed by Obama, would curtail inversions by insisting on foreign ownership of the newly combined company being increased to 50 per cent from 20 per cent and the new company retaining close connections to the US.


A former senior US treasury department member has pointed out that the Democratic president – who is struggling to pass anything by a Republican-controlled House of Representatives in a contentious election year – may not require new legislation to curb inversions.

Stephen Shay, a professor at Harvard Law School, said in an article published yesterday that the president could remove a key incentive for US corporations reincorporating overseas.

Obama could invoke a 1969 tax law that would restrict foreign companies using inter-company loans and interest deductions to reduce their tax bills, wrote Shay in an article spotted by news wire Reuters on Monday in the journal Tax Notes.

“People should not dawdle,” Shay said, noting how the regulatory power contained in section 385 of the US tax code was “extraordinarily broad” and was a “slam dunk” for the treasury department in tightening the rules on inversions.

Given Obama’s fighting talk and his frustration with House Republicans, he may act alone on this issue at a time when he has threatened to bypass Congress and take executive action on other issues.