From Burger King to Charlotte-based Chiquita, a wave of U.S. companies are looking to move their headquarters to lower-tax countries.
The math seems pretty simple: By reincorporating somewhere such as Ireland or Bermuda, a company can slash its tax bill dramatically.
But Ingersoll-Rand, an Irish-incorporated company with its CEO and executive offices in Davidson, shows such “tax inversions” don’t always go smoothly. More than a decade after Ingersoll-Rand moved offshore, the company is still fighting the IRS over disputed tax bills that could wind up costing it $774 million.
Ingersoll-Rand declined to comment on the tax case, saying it can’t discuss pending litigation. In legal and securities filings, the company has said all its tax strategies were legal and that it plans to defend itself vigorously.
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“We pay all applicable U.S. taxes on our earnings,” company spokeswoman Misty Zelent said in a statement. “The U.S. tax rate of 35 percent is the highest among industrialized countries. ... The need for comprehensive U.S. business tax reform is the real issue.”
Here’s how a tax inversion works: If a company is based in the U.S. and has operations overseas, it must pay taxes on its U.S. earnings as well as income from other countries when it brings those profits back onshore. But in a tax inversion, it reincorporates overseas, usually to a lower-tax country. The U.S. company is now its subsidiary.
The parent company, now overseas, pays taxes at a lower rate. It can also access any money it has kept overseas, as well as new overseas earnings, without having to pay U.S. taxes on that income. The company still pays U.S. taxes on its earnings in this country.
Moved to Bermuda
Ingersoll-Rand, which manufactures everything from Club Car golf carts to Trane air conditioning systems, employs about 2,000 in Mecklenburg County, the majority at its Davidson corporate offices off Interstate 77.
It was one of the first major U.S. corporations to move offshore in an inversion deal. In 2001, Ingersoll-Rand decided to switch its corporate address to Bermuda, cutting its tax rate sharply and reducing its annual bill by hundreds of millions of dollars.
For 2000, its last year paying taxes as a U.S.-based company, Ingersoll-Rand said it owed $284 million in taxes worldwide. The next year, thanks to the move to Bermuda, Ingersoll-Rand said it actually got back $2.9 million, as its effective tax rate plunged from 34 percent the year before to negative 1 percent.
“The move enabled us to remain competitive globally and invest in the company to create a stronger enterprise that offers job stability in the U.S. and all over the globe,” Zelent said.
In 2009, Ingersoll-Rand moved again, this time to low-tax Ireland. The relocation was prompted, Ingersoll-Rand said, by Ireland’s European Union membership and Ingersoll-Rand’s Irish operations, which employ about 700.
The IRS hasn’t challenged Ingersoll-Rand’s actual move to Bermuda. Instead, the federal tax agency has taken issue with the way Ingersoll-Rand moved money between the Bermuda-based parent company and its U.S. subsidiary. The parent company made loans to its U.S. subsidiary, which then routed repayments through other countries back to Bermuda in a way the government says was designed to avoid taxes.
Ingersoll-Rand has said all its moves were proper and served legitimate business purposes, and said it plans to continue fighting the IRS.
Inversions under fire
A recent wave of corporations announcing inversions has drawn fire from politicians. President Barack Obama and Democratic lawmakers have blasted such moves as unpatriotic, while politicians from both parties have pointed to inversions as evidence that the U.S. corporate tax system is broken.
Last week, the Treasury Department introduced new regulations intended to make inversions more costly and less attractive.
“It is critical that this unfair loophole be closed,” Treasury Secretary Jacob Lew said.
Whether or not the IRS succeeds in actually recovering back taxes from Ingersoll-Rand, corporate tax specialist Robert Willens said the agency could be sending a message to others who are considering inversions. He said Ingersoll-Rand appears to have a basis for its tax strategies, and that it’s often hard for the IRS to win such cases.
“Maybe the IRS is doing this just to scare people. ... They might just be trying to put the fear in people’s minds,” said Willens, a former Lehman Brothers managing director who runs a tax and accounting firm. “The possibility, however remote, that all those tax deductions you took were improper” could be enough to give companies pause before undertaking an inversion, Willens said.
“At the very least, you’ll be in for a decade of misery at the IRS.”
The IRS declined to comment on the case, which is pending in U.S. Tax Court in Washington, D.C. Willens said tax disputes between the IRS and corporations can drag on for years, but the Ingersoll-Rand case has been especially drawn-out.
“It’s growing whiskers,” Willens said.
Ingersoll-Rand’s move to Bermuda helped kick off the first major wave of inversions more than a decade ago, said Rebecca Wilkins, senior counsel with the Institute on Taxation and Economic Policy.
“It was one of the more publicized cases,” she said. “They didn’t make any bones about what they were doing. They were quite transparent about doing this to avoid taxes.”
In materials sent to investors, Ingersoll-Rand said at the time that the move would “reduce our worldwide effective tax rate,” as well as create “a more favorable corporate structure for worldwide expansion.”
In the years since it moved offshore, Ingersoll-Rand’s overall tax rate has fluctuated between 5.2 percent and 22.8 percent, securities filings show. The company has never again hit the U.S. corporate maximum rate of 35 percent.
Despite its Ireland address, Ingersoll-Rand remains a company with strong U.S. and North Carolina ties. Almost two-thirds of Ingersoll-Rand’s $12.3 billion worth of revenue in 2013 was from North America. The company recorded a $619 million profit last year.
Ingersoll-Rand’s roots stretch back to 1871, when the company was founded in New York making steam-powered rock drills. It has been in Davidson since the mid-1970s, when the company built an air compressor plant and offices on the shores of Lake Norman. The company’s local presence has grown over the decades, even as the official corporate headquarters has hopscotched from New Jersey to Bermuda to Ireland.
Michael Lamach, who became chairman and CEO in 2010, is based in Davidson, as are many of the company’s other top executives.
U.S. has tax treaties
The IRS case against Ingersoll-Rand dates to 2007, when the agency challenged the company over its 2002 taxes. The IRS is seeking $109 million in additional taxes and penalties.
The complex case boils down to money movements. The company’s Bermuda parent company loaned billions of dollars to its U.S. subsidiary. The U.S. subsidiary then paid back the loan, with interest, creating profits in tax-free Bermuda for the parent company and tax-deductible interest for the U.S. company.
The money was routed through Luxembourg, Hungary and Barbados. The U.S. has tax treaties with each of those countries, exempting loan repayments coming from the U.S. The IRS said it wants to treat the payments as if they were made directly to Bermuda, rather than routed through treaty countries. That means the payments would be subject to a 30 percent tax.
And last year, the IRS told Ingersoll-Rand that it’s also seeking $665 million worth of additional taxes and penalties from 2003 to 2006, according to securities filings. The company has warned investors it expects the IRS to seek additional taxes for years after 2006 as well.
Such money movements, with names such as “treaty shopping” and “earnings stripping,” are among the main ways in which inverted companies save on their tax bill, Willens said.
Ingersoll-Rand has said it intends to fight the tax cases brought by the IRS, and has defended its tax arrangements as legal and proper.
Ingersoll-Rand isn’t the only company the IRS is challenging. Last year, Tyco International said in securities filings that the IRS notified the company it owes more than $1 billion in back taxes and penalties.
The case is similar to Ingersoll’s: Tyco moved its corporate headquarters to Bermuda in 1997, and the IRS case stems from inter-company loans and interest payments between Tyco’s subsidiaries. That case also is pending.
The regulations announced last week by Treasury Secretary Lew are designed to make inversions less appealing.
The rules, which will apply to all pending inversions, make it harder for inverted companies to lend money between their international subsidiaries and bypass U.S. taxes. The rules aren’t retroactive, so they won’t affect Ingersoll-Rand.
Analysts have said they don’t expect the measures to dissuade many companies from moving to lower-tax countries. Lawmakers from both parties have called for comprehensive tax reform as the only long-term solution.
Some lawmakers have advanced proposals that would go further than the Treasury rules. Democratic Sen. Chuck Schumer proposed a bill that would limit earnings stripping by tightening the rules on how companies can use loans between subsidiaries. Although Bloomberg News reported a draft of Schumer’s legislation would have been retroactive to 1994 – which would affect Ingersoll-Rand – the bill he introduced earlier this month doesn’t include that timeframe.
Sens. Dick Durbin and Sherrod Brown, both Democrats, announced a bill two weeks ago that would require U.S. corporations to pay all deferred taxes on their overseas profits before reincorporating abroad.
The bill isn’t expected to pass, but it highlights the political furor that has built around inversions. Said Durbin, in a statement, “This measure will require corporations to pay their tax bill before they leave the country, preventing them from sticking the rest of us with their bill.”