Amid Inversion Crackdown, IRS Blesses Delphi's British Domicile

  • Partsmaker wins IRS dispute over 2009 address change
  • Decision comes as Treasury issues new rules to stop inversions

Three days after President Barack Obama held a news conference pledging to close “loopholes” that allow U.S. corporations to claim they’re foreign for tax purposes, his Internal Revenue Service blessed one of the biggest corporate expats.

That company is Delphi Automotive Plc, a Michigan auto-parts maker that attempted to cut its tax rate by adopting a British address in 2009. The IRS had insisted that Delphi, still run from a Detroit suburb, remained an American taxpayer. But on April 8, an appeals panel within the tax agency sided with the company. The secret decision came to light on Wednesday, when Delphi notified its investors in a regulatory filing. It may save the company as much as $100 million a year.

The decision comes as the Obama administration takes new and aggressive steps to stop corporate tax avoidance, particularly the corporate address changes known as inversions. On April 4, the Treasury Department issued new rules targeting the transactions, forcing the New York drugmaker Pfizer Inc. to drop plans to become Irish, and potentially crimping the tax savings from dozens of past and future inversion deals.

Unique Obstacles

The Delphi case may have presented unique obstacles, said Jerald David August, a partner at Kostelanetz & Fink LLP, a New York tax firm. The IRS may have worried that a loss in court would force it to revise a round of anti-inversion regulations from 2009, he said -- or that the case would bring unwelcome attention to the administration’s own role in Delphi’s expatriation. The company shifted its tax address as part of the fallout from General Motors Co.’s 2009 bankruptcy and bailout, which were overseen by Obama’s administration.

“The government threw in the towel when it may have had a strong case to present to a court to review,” said August, who wasn’t involved in the case. “The stakes involved in presenting this issue for full review may have had other, non-tax repercussions.”

For their part, Delphi officials had always insisted their case was strong and pledged in securities filings to “vigorously” defend their position. On Wednesday, the company  declined to comment beyond saying it’s “satisfied” with the IRS’s decision. The IRS also declined to comment.

GM’s Bankruptcy

The former auto-parts arm of Detroit-based GM, Delphi changed its legal address in 2009 as part of a plan to emerge from bankruptcy protection. Under the deal, creditors including GM and a group of U.S. hedge funds purchased most of Delphi’s assets through a newly formed English partnership.

The U.S. Treasury, which had bailed out GM amid a collapse in the U.S. auto market, took part in the negotiations and authorized GM to release $1.7 billion in Treasury funds to pay for its portion of the deal.

In September 2009, just before the transaction was completed, the IRS issued a new interpretation of tax law that seemed aimed at Delphi. It said a bankruptcy reorganization that results in a U.S. company becoming foreign may not be recognized under U.S. tax law. Delphi went ahead with the deal anyway.

Official Address

When it prepared to go public in 2011, Delphi incorporated itself in Jersey, a Crown dependency in the English Channel, but retained British tax residence. Its official address is at a diesel plant and research compound in an industrial park about an hour’s train ride east of London. Most of its top executives continue to work from the Troy, Michigan, offices that Delphi used to call its headquarters.

In 2014, the IRS, which is part of the Treasury Department, formally challenged Delphi’s foreign domicile, starting a litigation process within the agency.

In a regulatory filing in February, Delphi said that a loss in the IRS case would increase its long-term effective tax rate to about 20 percent or 22 percent, from about 17 percent. Analysts estimate Delphi will earn about $2.1 billion before taxes this year, translating to a savings of $63 million to $105 million.

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