21 November 2022 the US Supreme Court denied Whirlpool its request for judicial review of the December 2021 judgement of the Court of Appeal (Sixth Circuit).
10 August 2022 Whirlpool filed a “petition for writ” with the Supreme Court of the United States.
“Petitioners Whirlpool Financial Corporation & Consolidated Subsidiaries and Whirlpool International Holdings S.à.r.l. & Consolidated Subsidiaries collectively, “Whirlpool”) respectfully petition this Court for a writ of certiorari to review the judgment of the United States Court of Appeals for the Sixth Circuit in this case.”
The case revolves around a tax arrangement setup by the Whirlpool group, where a subsidiary in Luxembourg with one part-time employee (and subject to US CFC provisions) owned a Mexican manufacturing entity. The Mexican entity manufactured products for the Luxembourg subsidiary under a manufacturing services arrangement. According to the contractual setup, the subsidiary in Luxembourg owned all the raw materials, work-in-process, finished goods, machinery and equipment in Mexico. The products produced in Mexico was sold by the Luxembourg subsidiary to related parties.
As a result of this particular structure and the tax rules applied in Mexico and Luxembourg, a substantial part of the income was not recognised as taxable in nither Mexico nor Luxembourg. Mexico only taxed the manufacturing service fee and Luxembourg only taxed income considered derived in Luxembourg from administrative services.
However, the IRS considered the untaxed-income to be taxable in the US according to CFC provisions in IRC section 954(d)(2), and in 2017 an assessment of additional income ($45 million) was issued to Whirlpool US. The Tax Court upheld the assessment and later the US Court of Appeal upheld the decision of the tax court.
Section 954(d)(2) states: Certain branch income. —For purposes of determining [FBCSI] in situations in which the carrying on of activities by a controlled foreign corporation through a branch or similar establishment outside the country of incorporation of the controlled foreign corporation has substantially the same effect as if such branch or similar establishment were a wholly owned subsidiary corporation deriving such income, under regulations prescribed by the Secretary the income attributable to the carrying on of such activities of such branch or similar establishment shall be treated as income derived by a wholly owned subsidiary of the controlled foreign corporation and shall constitute [FBCSI] of the controlled foreign corporation.
The question as presented by Whirlpool in the Petition
“Numerous statutes are expressly conditioned on the promulgation of regulations that delineate when or how a particular statutory provision applies. In Section 954(d)(2) of the Internal Revenue Code, for example, Congress declared that certain income earned abroad by foreign corporations is subject to U.S. taxation; but Congress explicitly conditioned § 954(d)(2)’s execution on “regulations prescribed by the Secretary [of the Treasury]” delineating the income subject to taxation. 26 U.S.C. § 954(d)(2).
Regulations implementing § 954(d)(2) have been in place, and relied upon by taxpayers in structuring their foreign operations, for over 50 years. In this case, the Internal Revenue Service claimed that certain income earned abroad was taxable under those regulations. The taxpayer strongly disagreed. The parties, in turn, vigorously debated the application and validity of the regulations, and the Tax Court decided the case under the regulations. In the decision below, however, a divided panel of the Sixth Circuit held that the taxpayer’s income was taxable under § 954(d)(2) without even consulting the regulations—even though, as the dissent below recognized, the income would not be taxable under the regulations. The question presented is:
Whether the divided Sixth Circuit properly held— in conflict with precedent of this Court and settled administrative-law principles—that a statute that is conditioned on regulations delineating its reach may be enforced without regard to those regulations?”
In presenting its case Whirlpool further states
“The decision below will have enormous practical consequences as well. U.S. companies, including Whirlpool, have relied on the regulations at issue in conducting their foreign operations for more than 50 years. As numerous commentators and amici curiae have made clear, the decision will directly affect many other taxpayers and produce billions of dollars of unjustified tax liability.”
“The exceptional importance of this case underscores the need for this Court’s review.
1. The tax implications of this case are enormous. Whirlpool alone faces the prospect of tens of millions of dollars of additional tax liability because of the decision below. To the extent the Sixth Circuit majority believed that result is justified because Whirlpool “avoided any taxation at all,” App. 10a, it was plainly wrong. Every penny of the income at issue here will be taxed by the U.S. when it is repatriated. Moreover, the lack of immediate U.S. taxation was correct because, as Judge Nalbandian recognized, the income is from manufacturing appliances in Mexico, is not FBCSI under the regulations, and is nothing like the artificially separated sales income that the FBCSI exception targets. See supra at 6-7, 16.6 Whirlpool, like any taxpayer, was entitled to rely on the regulations in “arrang[ing] [its] affairs” so its taxes were “as low as possible; [it was] not bound to choose that pattern which will best pay the Treasury.”
As numerous commentators have observed, the “stakes” of this case are “enormous.
By some estimates, there are thousands of maquiladora companies, and branch structures like those at issue in this case have become “ubiquitous.”
The Silicon Valley Tax Directors Group and other organizations together representing thousands of member corporations with an aggregate market capitalization of over $10 trillion likewise explained that this case is exceptionally important because the majority “cast doubt on” the planning their members undertook in reliance on “Treasury’s branch rule regulations”—planning that implicates “hundreds of billions of dollars of foreign sales” each year.”
19 October, 2022 The Commissioner of Internal Revenue filed its respons.
“…That type of tax-avoidance practice can be illustrated with the potential operations of a U.S. corporation that has a manufacturing subsidiary in a foreign country with relatively cheap labor but a relatively high income tax rate. See Staff of the Joint Comm. on Internal Revenue Taxation, Tax Effects of Conducting Foreign Business Through Foreign Corporations, JCS-5-61, at 23-24 (July 21, 1961). If the manufacturing subsidiary were to sell its products directly to the U.S. corporation (for distribution to consumers), the manufacturing subsidiary’s income would be taxed at the relatively high rate. But if the U.S. corporation were to establish a second subsidiary in another country with lower taxes, then the manufacturing subsidiary could sell its products to the low-tax subsidiary at a price reflecting only the manufacturing costs, and the low-tax subsidiary— without adding any appreciable value to the products— could then sell the products to the U.S. corporation at the full (significantly higher) price. The firm could therefore reduce its overall tax payments by shifting sales income from the manufacturing subsidiary to the low-tax subsidiary. See id. at 23 (emphasizing that “a transfer of income” to “tax haven entities” “bring[s] about a substantial reduction in tax on the total income derived from the foreign operations”).”