US vs Eaton Corp., August 2022, Sixth Circuit, Nos. 21-1569/2674

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Category: MAP - APA, Transfer Pricing Methods | Tag: , , , , , , ,
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Eaton is an Ohio corporation with a global presence. It manufactures a wide range of electrical and industrial products. During the relevant period—2005 and 2006—Eaton had its foreign subsidiaries in Puerto Rico and the Dominican Republic manufacture certain products which Eaton then sold to its other affiliates and third-party customers. In 2002, Eaton applied for an APA related to these transactions.

In 2004 the IRS and Eaton entered into the first APA which covered tax years 2001 through 2005. And in 2006 a second APA was entered which covered tax years 2006 through 2010.

A few years after entering in to the APAs, Eaton reviewed its records and caught some inadvertent calculation errors. After letting the IRS know, Eaton corrected the mistakes. But the IRS thought that Eaton’s mistakes were serious enough to warrant its unilateral cancellation of the APAs for tax years 2005 and 2006. And after cancelling the APAs, the IRS handed Eaton a notice claiming a deficiency of tens of millions of dollars.

Eaton filed a petition in the Tax Court, challenging the deficiency notice and the IRS’s cancellation of the APAs.

The Tax Court sided with Eaton on the major issues, concluding that the IRS had wrongfully cancelled the APAs. However, the Tax Court also concluded that Eaton’s self-corrections didn’t constitute § 482 adjustments, and denied relief from double taxation. It reasoned that relief under Revenue Procedure 99-32 applies to § 482 adjustments only.

An appeal was filed by the tax authorities – and a cross appeal by Eaton – with the Sixth Circuit (US Court of Appeal).

Judgement of the Court

The Court sided with Eaton on all issues presented, including Eaton’s claim for relief form double taxation.

The Court held that (1) the IRS had the burden of proving that there were grounds to cancel the APAs under generally applicable contract-law principles and failed to meet that burden, and (2) the IRS could not impose IRC Section 6662 penalties on Eaton Corporation’s self-reported adjustments, and (3) that Eaton was eligible to claim relief from double taxation.

US vs Eaton Aug 2022 Sixth Circuit

Related Guidelines

TPG2022 Chapter IV Annex II paragraph 80 When a MAP APA is cancelled the date of cancellation will be determined by the nature of the event that led to the cancellation. This may be a specific date, for example if the event giving rise to the cancellation was a material change in tax law (although the MAP...
OECD COVID-19 TPG paragraph 96 In some situations, the APA agreement, domestic law or procedural provisions may prescribe procedures to follow, or describe the consequences that will arise, in situations where there is a failure to fulfil critical In these situations, tax administrations should follow the prescribed procedures.46 In other situations, tax administrations may have...
TPG2022 Chapter IV Annex II paragraph 76 The most drastic action is revocation, which has the effect that the taxpayer is treated as if the MAP APA had never been entered into. Less serious is cancellation, which means the taxpayer is treated as if the MAP APA had been effective and in force but only up to...
OECD COVID-19 TPG paragraph 100 In the context of the COVID-19 pandemic, there are two situations which may lead to cancelling an APA when it is established that: in FY2020 (i) there is a material breach in an APA’s critical assumption as a result of a change in economic circumstances; or, (ii) the taxpayer failed...
OECD COVID-19 TPG paragraph 99 In other circumstances, more general revisions may be required, depending on the specific facts and circumstances of a case, where allowed by domestic law. For example, tax administrations could consider evaluating the results of the transfer pricing methodology specified by the APA over the period of the APA, rather than...
TPG2022 Chapter IV paragraph 4.150 APAs involving the competent authority of a treaty partner should be considered within the scope of the mutual agreement procedure under Article 25 of the OECD Model Tax Convention, even though such arrangements are not expressly mentioned there. Paragraph 3 of that Article provides that the competent authorities shall endeavour...
TPG2022 Chapter IV Annex II paragraph 7 It is important to distinguish the different types of APAs and so the bilateral or multilateral APAs, which are the main subject of this annex, are hereafter referred to as “MAP APAs”. The APAs that do not involve a mutual agreement negotiation are referred to as “unilateral APAs”. The generic...
OECD COVID-19 TPG paragraph 109 Where taxpayers and tax administrations are negotiating APAs that are intended to cover FY2020, all parties are encouraged to adopt a flexible and collaborative approach to determine how to take into account the current economic conditions, and the various options discussed above in relation to the revision of existing APAs...
TPG2022 Chapter IV paragraph 4.158 Unilateral APAs may present significant problems for tax administrations and taxpayers alike. From the point of view of other tax administrations, problems arise because they may disagree with the APA’s conclusions. From the point of view of the associated enterprises involved, one problem is the possible effect on the behaviour...
TPG2022 Chapter IV paragraph 4.161 An APA program may initially place a strain on transfer pricing audit resources, as tax administrations will generally have to divert resources earmarked for other purposes (e.g. examination, advising, litigation, etc.) to the APA programme. Demands may be made on the resources of a tax administration by taxpayers seeking the...

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