The latest twist in a long-running saga between Whirlpool and the US Internal Revenue Service has seen the home appliances company send a new brief to the Supreme Court on Wednesday. The case could have significant implications on how US businesses organise their foreign operations, and according to some commentators could even produce billions of dollars in additional tax liability.
Reports from specialist legal media, including Bloomberg Law and Law 3600, show that Whirlpool believes the Sixth Circuit turned “ordinary administrative-law principles on their head” in ignoring regulations when it ruled by two to one in June that income earned by its Luxembourg controlled foreign corporation (CFC) was foreign base company sales income under the branch rule of an Internal Revenue Code. The ruling confirmed that Whirlpool owed taxes on $45 million made by its Luxembourg subsidiary.
Two weeks ago, the Department of Justice had urged the Supreme Court to dismiss Whirlpool’s challenge.
Luxembourg subsidiary in 2007
The long-running dispute dates back to May 31, 2007, when Whirlpool restructured its operations and created Whirlpool Overseas Manufacturing (WOM)--with one administrative employee, a certain Nour Eddine Nijar, located in the grand duchy and established in an office at 50 Val Fleuri in Rollingergrund/Belair-Nord.
But on August 1, 2007, petitioner transferred ownership of WOM to Whirlpool Luxembourg, a private limited liability company indirect wholly owned subsidiary of Whirlpool that had previously been named Maytag Luxembourg.
Mr Nijar, according to United States Tax Court judge Albert G. Lauber, “performed modest administrative functions, including payment of rent, utilities, and other expenses incurred by the Luxembourg office. He also signed contracts on behalf of WOM and signed checks drawn on its bank account.”
WOM in turn owned a Mexican disregarded entity (DE) that manufactured products for the Luxembourg company using seconded employees of a related Mexican CFC. WOM sold the products and also owned the raw materials, work-in-process and finished goods, as well as the machinery and equipment used to manufacture the products--all of which were located in Mexico, according to reports.
Luxembourg-Mexico tax treaty
Mexico taxed the manufacturing service fee earned by the Mexican company, but under a Mexican regime that offers favourable tax benefits to companies manufacturing in the country, the Luxembourg CFC was deemed to not have a taxable permanent establishment in Mexico. On the other hand, Whirlpool received a tax ruling from Luxembourg confirming WOM as deriving its sales income through the Mexican company. Under the rules of a Luxembourg-Mexico tax treaty, WOM was therefore taxed only income derived in Luxembourg for its administrative services. Because of US tax deferral, the income was also not immediately taxed in the U.S.
But in 2020, Judge Albert G. Lauber’s opinion was that “by carrying on its activities ‘through a branch or similar establishment’ in Mexico, Whirlpool Luxembourg avoided any current taxation of its sales income. It thus achieved ‘substantially the same effect’--deferral of tax on its sales income--that it would have achieved under US tax rules if its Mexican branch were a wholly owned subsidiary deriving such income.”
Whirlpool did appeal to the Sixth Circuit, but it lost there in December as well. The company has argued in its brief that the US authorities have concocted what it calls “a revisionist history that seeks to mask the fact the Sixth Circuit reached a result never before urged (or even imagined)” by the Internal Revenue Service.
The seriousness of the case is underlined by the fact that three of the big four in the US, PwC, Deloitte Tax and KPMG have joined forces to submit an amicus brief in support of Whirlpool. EY did not participate because it is Whirlpool’s financial statement auditor.