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This week the Obama administration announced new regulations aimed at discouraging the controversial practice of corporate inversions. That's what happens when a U.S. company merges with a foreign partner, so it can move its headquarters overseas and cut its tax bill. As NPR's Jim Zarroli reports, the new rules are likely to slow but not stop the number of inversions now being planned.
JIM ZARROLI, BYLINE: For a lot of U.S. companies the appeal of an inversion is obvious. By moving their legal headquarters overseas they no longer have to pay U.S. taxes on money they make abroad. But Steven Rosenthal, of the Tax Policy Center, says the new rules announced this week will make some of them ask whether the change is worth it.
STEVEN ROSENTHAL: I think there are a couple of dozen of U.S. companies who were on the runway, ready to take off through an inversion, that are now working closely with their lawyers to evaluate whether or not the tax benefits and business benefits of inverting makes sense after treasury's efforts.
ZARROLI: Perhaps the most important change involves what are called hopscotch loans. Right now, a lot of U.S. companies have huge amounts of money stashed overseas. By inverting they can start to use some of that money without paying U.S. taxes. They do this by lending it directly to their new foreign parent company, bypassing the IRS. Now, says Dick Harvey, Professor of Law at Villanova University, the government is going to try to crack down on hopscotch loans.
DICK HARVEY: I refer to it as eliminating or removing some of the low hanging fruit that U.S. multinationals could easily pick when contemplating an inversion.
ZARROLI: The administration also plans to tighten ownership requirements for companies that want to move abroad. Right now a company interested in merging and relocating has to find a partner at least a quarter its size. But companies have a lot of ways of getting around the requirements by making the foreign partner look bigger than it is. Now the IRS will make such moves more difficult. Harvey says these measures will have some impact.
HARVEY: For those where tax was really driving the transaction, then I think these regulations will, you know, stop those or slow those significantly.
ZARROLI: But Alan Viard, resident scholar at the American Enterprise Institute, says there's a limit to what the administration can do without new legislation from Congress. Something that's not likely to come anytime soon.
ALAN VIARD: In my opinion, the new regulations will have only a modest impact on the number of inversions taking place.
ZARROLI: Viard notes that the new rules say nothing about the controversial practice of interest stripping. A U.S. subsidiary borrows money from its foreign parent company; it then gets to deduct the interest it pays, which can cut its U.S. tax bill significantly.
VIARD: They've not really changed the principle features of what's going on here. Some of them they can't change in regulations - they need legislation for - and others, like interest stripping, they've chosen not to address at this stage.
ZARROLI: And if history is any guide companies are likely to come up with new, more creative ways to get around the rules announced this week, says Stephen Rosenthal.
ROSENTHAL: Tax lawyers are very enterprising. You know, I practiced 25 years myself and I can see a variety of ways to challenge and sidestep some of these new limitations.
ZARROLI: But with a number of inversions growing, the White House is under pressure to do something about the issue. And that means tinkering around the edges until Congress is ready to do more. Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.
