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As governments crack down on tax-driven profit-shifting, the IRS
is asserting that a loan used by Illinois Tool to bring foreign cash
from a Bermuda-based subsidiary into the United States was not a
tax-free transaction.
Instead, the IRS argues that the transaction was a repatriation of
foreign profits equivalent to a taxable dividend-style distribution.
A victory for the IRS in the case would jeopardize similar
transactions undertaken on a tax-free basis, tax lawyers say.
“This is foreign tax planning 101 ... Every Fortune 500 company in
America that is multinational does this,” said Jasper Cummings, a
tax lawyer for Alston & Bird LLP, who reviewed the case for Reuters.
"If the IRS wins this, it will be a hell of a win," he said.
The Glenview, Illinois-based diversified manufacturer, which makes
everything from vehicle parts to food service equipment to arc
welding tools, filed its Tax Court petition last month, challenging
the tax agency's position.
Illinois Tool said it could owe $70 million if it loses the case,
according to a May regulatory filing. No trial date has been
scheduled.
Both the company and the IRS declined to comment on Friday.
In 2006, Illinois Tool needed cash in the United States to retire
outstanding commercial paper and fund acquisitions, according to the
company's court filing.
The filing said Illinois Tool decided to repatriate cash from its
roughly $6.4 billion of earnings held overseas.
The company structured the transaction as a loan, with a maturity
date and a fixed interest rate. But in 2010 the IRS uncharacterized
the loan as a taxable dividend, the filing said.
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The case comes amid growing scrutiny of international corporate tax
issues. An anti-tax avoidance project is under way at the
Organization for Economic Co-operation and Development. Known as the
Base Erosion and Profit Shifting (BEPS) project, the effort calls
for revising tax treaties, tightening rules and increasing
government tax information sharing.
The OECD is expected to make BEPS recommendations to the Group of 20
economies by the end of next year.
"Repatriation is becoming an increasingly significant issue," said
Miriam Fisher, co-chair of the tax controversy practice at law firm
Latham & Watkins LLP.
"It will be the subject of coming litigation and this case certainly
brings the issue to the forefront," she said.
The case is Illinois Tool Works Inc & Subsidiaries v. Commissioner
of Internal Revenue; Docket No. 010418-14.
(Reporting by Patrick Temple-West; Editing by Kevin Drawbaugh and
Dan Grebler)
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