Treasury Secretary Lew Moves to Restrict Corporate Tax Inversion

NEW YORK (TheStreet) –- U.S. Treasury Secretary Jack Lew delivered on his promise that the White House was going to do something to slow down or stop the practice of corporate tax inversion. Under inversion, a U.S. company merges with a smaller foreign company and later relocates its headquarters overseas. That move is taken to capture a smaller tax rate for the combined companies.

Lew's effort to halt or limit the use of corporate inversion begun sixty days ago, when the Treasury Secretary sent a letter to the chairman of the House Ways and Means Committee, asking for tax reform legislation to limit inversion. But with 42 days left until the mid-term November elections, many feel that he had to do something before the fall elections. As a result, Lew has come up with a "quick fix" to get the issue in front of the voting public.

In the meantime, the issue has become more politically charged. Pres. Obama quickly followed up Secretary Lew's initiative in a speech given at the Los Angeles Trade-Technical College where the president called the companies who have completed such transactions "corporate Deserters," saying they are giving up their American citizenship. 

The problem with rushing a policy into place that is not well thought out, or is not sufficiently comprehensive is that the policies can often have "unintended consequences."

The stakes are potentially high. It has been estimated that the U.S. could lose as much as $17 billion in corporate taxes, due to inversion. 

Obama's administrative action is unlikely to achieve exactly what it wants, because an administrative action goes only so far. For example, Sen. Charles E Schumer welcomes the changes that the Obama administration was introducing, but added that the only real way to stop the practice would be for legislation to take place.

The thing is that both parties in Congress believe that corporate tax reforms need to be legislated. At this time, however, that is not going to get done. The two parties address tax reform from different starting points. Tax reform will take time and demands the right kind of leadership.

First of all, the rules are being studied to determine whether or not there should be legal challenges to Monday's actions.

Furthermore, what is often found in cases of government rule making is that corporations find ways to get around the newly crafted restrictions. The new rules may for a time reduce the number of "inversions" that take place, but don't eliminate them.

The rules aim to reduce the ability of companies to meet the foreign ownership threshold by deducting certain assets (for example cash) from the value of the acquired foreign company. They also prevent the company doing the acquiring from getting rid of assets before the deals are completed, an effort that reduces the size of company involved.

I have not heard much at this date from the corporate world. It is an area, I believe, that must be approached carefully because the strategy of the administration is clear. The issue has already been raised to an emotional state and declaring corporations that have already done something like this as corporate deserters that have already given up their citizenship.

Tax reform legislation is needed. All parties agree on that. This blatant effort to make the part of tax reform specifically related to corporate "inversion" issue does not really help to move the issue forward. And, the effort might even make the situation worse than it now is.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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