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Ingersoll-Rand fights IRS “treaty shopping” case in U.S. Tax Court

November 26, 2013

By Patrick Temple-West, Howard Goller and Leslie Gevirtz

WASHINGTON (Reuters) – Manufacturer Ingersoll-Rand Plc has gone to court to challenge a $109.8 million tax bill from the U.S. Internal Revenue Service for alleged “treaty shopping” whereby multinationals move money around the world for tax benefits.

In U.S. Tax Court documents filed this month, the IRS said Ingersoll owed U.S. taxes and penalties on money it moved in 2002 into Bermuda, where the company was headquartered at the time.

Ingersoll, which makes Trane air conditioners and Schlage locks, argues that it correctly moved U.S. cash into Bermuda via Barbados, Hungary and Luxembourg, according to a court filing.

By routing the U.S. money through these three countries before it landed in Bermuda, the company said it correctly avoided a 30 percent tax the United States applies on cash flows into countries where it does not have a tax treaty.

In an October filing with the U.S. Securities and Exchange Commission, Ingersoll said the IRS had recently assessed the company a $665 million tax bill for 2003 through 2006 related to its payments into Bermuda. In the filing, Ingersoll wrote: “The company has vigorously contested all of these (IRS) proposed adjustments and intends to continue to do so.”

A spokeswoman for Ingersoll did not respond to requests for comment on Monday.

In 2001, the company moved its headquarters to Bermuda from the United States, a practice known as “inversion” that remains a popular, tax-avoidance transaction. In an inversion transaction, a multinational replaces a U.S.-based parent company with a foreign parent in a low-tax or no-tax country.

The company moved its headquarters again in 2009 to Ireland, another low-tax country.

TAX LOOPHOLE

The tax court dispute illustrates the treaty-shopping tax loophole, which prevents high-tax countries from collecting taxes on multinationals when they legally use the global tax treaty network to move money into low-tax jurisdictions.

Though legal, treaty shopping leads to IRS disputes, said Daniel Berman, a principal with accounting firm McGladrey LLP.

“There are weaknesses in the rules that prohibit it,” Berman said of treaty shopping. But for multinationals, “it’s pretty prevalent. It’s tax planning.”

Congress has failed to pass legislation that might stop treaty shopping. The Joint Committee on Taxation estimated that a 2010 bill introduced in the U.S. House of Representatives would raise $7.7 billion over 10 years in anti-treaty shopping protections.

U.S. officials have signed tax treaties with Hungary and Luxembourg that eliminate the treaty-shopping loophole. But those treaties have languished in the U.S. Senate.

The United States has tax treaties with more than 60 countries, ranging from China to Kyrgyzstan. These agreements routinely won Senate approval with little controversy and accomplished their main purpose of preventing double-taxation of income and profits.

A lawyer representing Ingersoll for Skadden, Arps, Slate, Meagher & Flom LLP declined to comment on Monday. The IRS did not respond to requests for comment.

The case is Ingersoll-Rand Company & Subsidiaries vs Commissioner of Internal Revenue; Docket No. 25769-13.

(Editing by Howard Goller and Leslie Gevirtz)