Treasury Secretary Jacob Lew said this week that the Obama administration is considering administrative options to curb inversions. The comments mark a significant shift from just a few weeks ago, when Lew said he didn’t believe Treasury had the power to address inversions without legislation.

The announcement came just hours after Senate Democrats wrote to Lew asking Treasury to take immediate administrative action to curtail the tax benefits U.S. companies receive for merging with offshore companies and reorganizing as foreign entities. The Democratic pressure was spurred at least in part by an article from former Treasury Deputy Assistant Secretary Stephen Shay, who argued that Treasury is already authorized to limit the tax benefits of inversions. Shay said Treasury could write regulations under Section 385, Section 956 or several other sections to limit expatriated entities’ use of inter-company debt to strip earnings out of the United States.

Treasury said it’s reviewing a broad range of actions that could either limit companies’ ability to engage in inversions or reduce the tax benefits after inversions take place. Lew’s comments may also be intended to use the threat of regulatory action to curb the slew of recent inversion transactions. He told The New York Times he wants to “change what’s happening [by] putting companies on notice.”

Lew acknowledged that the best way to address the growing trend of U.S. companies’ inversions would be through comprehensive tax reform with specific anti-inversion proposals. Congress has left for the August recess, but inversions continue to be a hot issue for lawmakers. House Ways and Means Committee ranking minority member Sander Levin, D-Mich., unveiled a proposal that would limit the benefits of earnings stripping by changing Section 163(j) and Section 956. Senate Finance Committee member Chuck Schumer, D-N.Y., has said he intends to write legislation to limit interest deductions and prevent earnings, similar to proposals the administration has offered in the budget.

Treasury secretary willing to consider regulatory response to inversions

administrative options to curb inversions

Treasury secretary willing to consider regulatory response to inversions

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Finance Committee Chair Ron Wyden, D-Ore., has expressed support for legislation that would strengthen the anti-inversion rules in Section 7874 retroactively from May. But so far, Finance Committee ranking minority member Orrin Hatch, R-Utah, is one of the few Republicans to express any openness to enact legislation on inversions outside of tax reform. Hatch said he would consider legislation only if it is revenue neutral and not punitive or retroactive.

Republicans and Democrats appear to have little common ground on the issue for now, and the upcoming elections and short legislative calendar make action an uphill battle. The issue has garnered the interest of lawmakers on both sides of the aisle, though, and it will likely help drive for future tax reform.

ContactMel SchwarzPartner, Washington National Tax OfficeGrant Thornton LLPT 202.521.1564E mel.schwarz@us.gt.com