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President Obama says he's looking for ways to stop the spread of corporate inversions. Here's how they work. A U.S. corporation merges with a smaller foreign company, then moves its legal headquarters overseas to lower its tax rate. But as NPR's Jim Zarroli reports, there are limits to what the administration can do to discourage these transactions without the approval of Congress, and that's unlikely to anytime soon.
JIM ZARROLI, BYLINE: The number of corporate inversions is small. The Congressional Research Service says just about a dozen were in the works at the end of May. But some big companies such as Medtronic are pursuing the strategy, and Edward Kleinbard of the University of Southern California says the phenomenon is growing.
EDWARD KLEINBARD: It's a very attractive technique, and that's the reason why one might expect exponential growth if left unchecked.
ZARROLI: There's nothing illegal about inversions. Congress passed a law in 1994 that set limits on corporations looking to move overseas. Kleinbard, author of the book, "We Are Better Than This," says the law was probably too lax and helped make the current surge in inversions possible. But until the law gets rewritten, there's not a lot that can be done about it.
KLEINBARD: That is a rule that Congress, as keeper of the tax model - Congress, in my view, alone, can change.
ZARROLI: The problem is that in the current political climate, Congress has shown little desire to deal with the issue. Republicans have made clear they will address the problem only in the context of broader reform that lowers corporate tax rates, which they say are way too high. The Obama Administration first said there was little it could do to stop inversions without the help of Congress. More recently President Obama has said he's looking for ways to discourage inversions within the scope of current law. Here he was at a press conference last night.
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PRESIDENT BARACK OBAMA: 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 maybe are trying to take advantage of this loophole.
ZARROLI: The administration appears to have some steps it can take on its own. It might bar companies that do inversions from getting federal contracts. It also might challenge some of the tax avoidance strategies that such companies use, such as shifting money from one foreign subsidiary to another and calling it a loan. Lee Sheppard, contributing editor of Tax Notes says that kind of aggressive treatment by the IRS could discourage some inversions.
LEE SHEPPARD: When the administration comes and he says we're going to make it difficult, and we're going to make your accountants look twice at it - that, you know, sort of throws a monkey wrench into things.
ZARROLI: But Sheppard also says there are real limits to what the administration can do because federal law sets the bar for inversions pretty low. She also believes the current focus on inversions could bring about a sudden surge in new deals. Even now she says lawyers and hedge fund executives are going to corporate chief executives and telling them...
SHEPPARD: You really got to think about this thing because if you don't do it now, they're going to fix the laws and you won't be able to do it all if you ever thought you wanted to do it. It's kind of like, buy now. You know, stuff's on sale.
ZARROLI: Sheppard says for various reasons, inversions just aren't right for many companies. But until the law is changed, companies that can carry out such deals will be tempted to do so. Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.
