January 13th, 2016
Industrial manufacturer Ingersoll-Rand Co. has agreed to pay $86 million dollars to settle a 2002 tax dispute with the IRS. The agreement entered on December 31, 2015, related to Ingersoll-Rand’s attempt to avoid withholding taxes on intercompany financing transactions with their Bermuda subsidiary. The dispute is a result of Ingersoll-Rand’s 2001 reincorporation to Bermuda. They have since moved to Ireland.
During 2002, the Bermuda entity made a series of loans to the U.S. company in exchange for interest bearing notes that were then transferred to the entities in favorable treaty jurisdictions. The IRS asserted that a conduit financing arrangement was set up to use U.S. tax treaties to reduce withholding taxes through Barbados, Hungary and Luxembourg. If the payments would have gone straight to Bermuda, a 30% withholding would have applied under IRC section 881. Instead, the company attempted to use the reduced withholding rates provided in tax treaties. The Luxembourg and Hungary treaties with the U.S. do not impose a withholding on interest payments, and the Barbados-U.S. tax treaty imposes a five percent withholding rate. Disagreements between the parties also focus on the beneficial owners of the notes.
By agreeing to the settlement, the IRS waived all penalties for failure to deposit tax, IRC section 6656, and accuracy related penalties, IRC section 6662.
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