Delphi latest in fight over offshore U.S. tax shelters

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DETROIT -- Delphi Automotive plc is in the crosshairs of a battle between the IRS and many large American companies over the use of offshore tax shelters.

Delphi is the latest corporation in dispute with the federal government over its tax practices. The IRS notified the supplier last month it would be taxed as a domestic corporation, despite its previously established tax domicile in the United Kingdom, the company said in a U.S. Securities and Exchange Commission filing.

The ruling, which Delphi is appealing, is expected to cost the supplier millions and adds to a list of companies avoiding much of the U.S. tax code -- and roiling the IRS, experts said.

Apple Inc., Google Inc. and many other Fortune 100 companies have been targets of the IRS by incorporating portions of their businesses offshore that allow them to avoid U.S. taxes as well as other foreign income taxes.

Chrysler announced plans for a similar move in January as it completed the terms for its $4.35 billion merger with Fiat. Fiat shareholders are meeting Aug. 1 to formally approve the deal. Fiat Chrysler Automobile NV will then maintain its formal headquarters in London while Chrysler continues to be based in Auburn Hills, Mich., and Fiat maintains its headquarters in Turin, Italy. 

"Headquarters will be in London," Fiat Chrysler CEO Sergio Marchionne told journalists in May. "It's clear that group executive functions, the board, my office, some of my functions, need to operate out of London, but that doesn't mean that I'm giving up my operational responsibilities of the U.S. We will be multi-faceted ... we will do stuff everywhere."

Delphi and the IRS declined to comment on the June ruling. The IRS also declined to comment on its strategy for handling foreign tax domiciles.

Overseas revenue

At the center of Delphi's dispute is what the IRS calls tax manipulation by U.S.-based corporations operating globally. Under U.S. tax code, domestic corporations must pay U.S. income tax on total global income, including that generated in other countries. The workaround, therefore, is to incorporate in those other countries.

John Barrie, partner at international law firm Bryan Cave LLP in New York City, said until U.S. regulation is better defined, and on par with other countries, the practice will continue.

"Certainly, there are members of Congress that think Delphi, and others, should be paying more in U.S. taxes," Barrie said. "These companies aren't evading U.S. taxes, but they are avoiding them within the law and unless there is legislation, it will continue."

Barrie said the true test will come when a company finally takes the IRS ruling to court. Delphi has stated it will litigate if its appeal with the IRS is rejected.

Whether it wins or loses the appeal, analysts don't believe the tax liability in question is enough of a financial line item to affect Delphi's long-term outlook or stock performance. David Leiker, a Milwaukee-based analyst for Robert W. Baird & Co., said in an analyst note that Delphi would likely seek a lower tax rate in the U.S. tied to future net operating losses.

Delphi's net operating losses in 2008, the last year it retained a U.S. tax base, were $483 million, Leiker wrote.

Looking for tax relief

After its emergence from Chapter 11 bankruptcy protection in 2009, Delphi set up its tax base in the United Kingdom. Its operational headquarters and executive team remain near Detroit in Troy, Mich.

In 2013, Delphi paid $256 million in taxes at a 17 percent effective rate, according to SEC filings. That figure could rise to as much as 22 percent under the U.S. tax code, it said in a filing. Under the tax code, Delphi's tax spend could have increased more than $75 million, to roughly $331.3 million, in 2013.

Delphi reported net income of $1.4 billion on total revenue of $16.5 billion in 2013.

The company said in its SEC filing that it would defend its tax practices.

"We intend to vigorously contest the conclusions reached in the (Notice of Proposed Adjustment) through the IRS administrative appeals process, and, if we are unable to reach a satisfactory resolution with the IRS, through litigation," the company said in the June 26 SEC filing.

The issue, with Delphi as the latest poster child, has become one of the bargaining chips in discussions about global competitiveness, tax experts say.

Jason Rauhe, principal and director of the international tax practice at Rehmann Robson LLC in Troy, said most countries have eliminated global taxation for domestic-based corporations in their tax codes, creating a competitive advantage.

He also said there's been a shift during the past 15 years to more companies incorporating part of their business overseas. It also makes their accounting simpler.

"The U.S. tax system is incredibly complicated," Rauhe said. "This system adds a layer of complexity and confusion that companies simply want to avoid."

The dollars add up: The U.S. Senate Permanent Subcommittee on Investigations released a report last year that said Apple avoided $9 billion in U.S. taxes in 2012 due to forming foreign entities overseas.

In 2002, The Stanley Works, now called Stanley Black & Decker Inc., became the first major corporation to attempt to set up a foreign tax domicile in Bermuda. Stanley planned a foreign entity in Bermuda which would have bought out much of its U.S. assets -- a move called corporate inversion -- but abandoned the idea after public scrutiny.

Connecticut-based Stanley estimated it would save $30 million annually in taxes by reducing its effective tax rate to as low as 23 percent from 32 percent, it said in a regulatory filing at the time.

Legislative push

But resurgence in "anti-inversion" sentiment is fueling the fire in the debates over appropriate taxation policies.

U.S. Sen. Carl Levin, D-Mich., introduced the Stop Corporate Inversions Act of 2014 in May. His bill follows dozens of similar bills that have largely failed to change tax practices in this area.

Under Levin's bill, if a U.S. corporation owns at least 50 percent of the foreign entity, it would be taxed under the U.S. tax code. The tax code would also apply if management of the entity and if more than 25 percent of its employees were located in the U.S.

Manufacturers, including automakers and suppliers, are watching the issue closely.

Richard Hilgert, an automotive equity analyst for Chicago-based Morningstar Inc., said that while the threat of higher U.S. taxes is very real, the issue isn't shaking investor confidence in the automotive industry.

"I think there is some concern, but it's definitely not a major point right now," Hilgert said. "Obviously, for Fiat Chrysler, it could have an impact since they're trying to get the U.K. as their tax headquarters -- and they need to be frugal with every bit of the cash they generate -- but it's not an immediate concern for the industry."

Delphi ranks No. 13 on the Automotive News list of the top 100 global suppliers with worldwide sales to automakers of $15.5 billion in 2013. 

You can reach Dustin Walsh at dwalsh@crain.com.


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