Delphi Automotive PLC won an appeal with the IRS allowing the company to be treated as a U.K. tax resident for U.S. federal tax purposes. The tax agency had claimed in 2014 that Delphi, whose top executives are in Troy, Mich., should be treated as a U.S. corporation for income tax purposes even after it reincorporated in the U.K.
In its filing with the Securities and Exchange Commission (SEC), Delphi said the IRS concluded that the company won’t have to adjust its 2009 and 2010 tax returns. Delphi was a part of General Motors Co. until 1999. It emerged from bankruptcy proceedings in 2009 and formed a limited liability partnership registered in Gillingham, England.
Delphi’s SEC filing doesn’t mention any adverse tax consequences under the anti-inversion rules (for example, limiting the use of certain tax attributes). However, even if the U.S. tax law respects the foreign status of the foreign acquiring corporation, other potentially adverse tax consequences may follow if the continuing ownership stake of the shareholders of the former U.S. entity is at least 60%.
Pfizer, Allergen call off deal
The announcement came in a filing with the SEC just days after Pfizer abandoned its merger plans with Ireland-based Allergan, which in turn came only days after the IRS and the U.S. Department of the Treasury announced new temporary U.S. regulations aimed at slowing corporate inversions.
A corporate inversion may take many forms, but has been generally described as a transaction that results in a U.S. parent corporation of a multinational group being replaced with a foreign parent. An inversion is typically accompanied or followed by certain transactions that are intended to remove foreign operation income from the U.S. taxing jurisdiction. In addition, the corporate group may derive further advantage from the inverted structure by reducing U.S. tax on U.S.-source income through earnings stripping or other transactions.
Allergan’s CEO Brent Saunders said he felt that “for the rules to be changed after the game has started . . . is a bit un-American, but that’s the situation we’re in.” But, in announcing the new regulations, Treasury Secretary Jacob Lew said, “Today, we are announcing additional actions to further rein in inversions and reduce the ability of companies to avoid taxes through earnings stripping. This’ll have an important effect, but we can’t stop these transactions without new legislation. … Ultimately, the best way to address inversions is to reform our business tax system.”
White House press secretary Josh Earnest said the Treasury wasn’t focusing on any specific transaction, but rather closing loopholes that allow companies to lower tax bills by changing their address.