The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
June 1 — Tyco International Plc and its former affiliates finalized a settlement with the IRS over the recharacterization of intercompany loans issued during 1997-2000 ( Tyco Elec. Corp. v. Commissioner, T.C., No. 16651-13, stipulated decision 5/31/16 ).
More than $1 billion in deficiencies and penalties were at stake in the complex litigation, which consolidated 15 separate petitions filed in the U.S. Tax Court by a dozen companies that had once been part of the Tyco conglomerate.
Tyco International, TE Connectivity Ltd. and Medtronic Plc—a successor in interest to former Tyco subsidiary Covidien Plc—were parties to a tax-sharing agreement for some of Tyco International's and Covidien's income tax liabilities for periods prior to and including June 29, 2007. In filings with the Securities and Exchange Commission May 31, the companies announced that their tax dispute with the IRS has been fully resolved, following a review of their agreement by the IRS Office of Appeals.
Tyco had announced a tentative agreement with the agency to make a cash payment of between $475 million and $525 million, including all interest and penalties, provided the IRS Office of Appeals applied the same settlement to all intercompany debt issues on appeal for 2001-07 (24 Transfer Pricing Report 1148, 1/21/16).
According to a Form 8-K filed by TE Connectivity, the companies entered into a stipulation of settled issues with the IRS to resolve all disputes related to intercompany debt matters for the 1997-2000 audit cycle. The stipulations were contingent upon IRS Appeals applying the same settlement framework to all intercompany debt issues for tax years 2001-07.
On May 17, Tyco International informed TE that IRS Appeals had issued fully executed Forms 870-AD that “effectively settled the matters on appeal on the same terms as those set forth in the Stipulations.”
On May 31, the U.S. Tax Court entered stipulated decisions in each of the 15 petitions. Therefore, the disputes before the Tax Court for tax years 1997-2000 and for 2001-07 are resolved, the companies said.
Further, TE Connectivity said in its 8-K that it expects the terms of the resolution will be “consistently applied by the IRS to the Company's U.S. income tax returns filed subsequent to 2007.”
The original Tyco International Ltd. was a Massachusetts company that began a major expansion in the late 1990s, acquiring more than 600 other companies with a total value of $35 billion by decade's end. Before the merger, Tyco was the largest global manufacturer and provider of fire protection systems and services; it also manufactured and sold disposable medical and speciality products, flow control products and electrical and electronic components.
Many of the acquisitions and the subsequent restructuring of entities within the conglomerate relied on intercompany loans. The IRS recharacterized many of the loans as equity transactions and disallowed interest expense deductions by the debtors, treating interest payments to foreign entities within the group as payments of taxable dividends.
The successor entities argued that the transactions were properly structured as third-party debt with stated interest rates, repayment schedules and fixed maturity rates. They maintained that the parties entered into the loan transactions with the expectation that the loans would be paid from operating cash flows.
It was previously reported that TE made a $443 million payment to the IRS to cover deficiencies and stop the accumulation of interest. TE was reimbursed for $305 million by Tyco International and Covidien under the terms of the tax-sharing agreement. TE also paid Covidien $2 million for its share of deficiencies for which Covidien was the primary obligor, TE said in its 8-K.
This means TE's net cash payment was $140 million in the second quarter of its share of the amount due to the IRS.
TE said it expects to recognize a net benefit of $525 million to $550 million in net income in the third quarter of 2016.
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