>>I would be surprised if Treasury's "rule" doesn't violate a plethora of those treaties.
I really don't think so.
The tax code and Regs have been the scene of a never-ending battle between the Treasury and too-smart tax lawyers figuring out tax avoidance schemes. One of the basic principles that the Treasury has used (with general support from the courts) is substance over form. Most of these new rules fall into that category. The CFC (Controlled Foreign Corporation) rules have been around forever and they breach no treaties - these are conceptually just fairly minor adjustments in those (very complex) rules.
A good example of the substance over form battle was zero-coupon bonds. Issue a bond at 70, pay no interest, redeem it at 100 a decade later. On the surface there is no annual income - just a capital gain at the end of the day. It looked even better if you sold it to someone else at 99 just before redemption - then that 29 gain certainly looked like a cap gain. In substance though you were getting what amounted to income every year even though in form you received no "income" until you sold.
Not saying these changes won't be challenged, particularly if they are applied retroactively. But I suspect most or all of them will be upheld eventually (many years from now), and meantime the rush to invert will halt.
Would have been much better of course to do this by passing a new law, but the GOP leadership refused to do that.
Peter
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