May 16, 2012
$190 million tied to Dutch tax shelter lost in battle against IRS.
HP has lost $190 million (€149 million) in a case against the Internal Revenue Service (IRS), with the ruling turning attention to a tax-cutting strategy created by American International Group (AIG) and utilised by a number of European banks, reports Reuters.
HP had sued IRS for the returns in 2009. Judge Joseph Goeke of US Tax Court ruled against the OEM.
Reuters states that the strategy, widely known as foreign tax credit generators, “involved trading derivatives with the aim of generating capital losses and foreign tax credits for large corporations, like HP, which then used them to try to lower their US tax bills”.
The IRS states that foreign tax credit generators lack economic substance and are engineered to create artificial financial benefits that are exempt for IRS deductions, and the IRS has outlawed many foreign tax credit generators around 2007.
HP’s take on the strategy involved a Dutch company created by AIG called Foppingadreef. Judge Goeke wrote that HP’s investments in Foppingadreef “were not valid for more than $15.5 million (€12.1 million) in capital-loss deductions claimed by HP in 2003 because the investments were not real economic bets”.
HP’s stakes were instead carefully positioned loans made by the OEM and, through Foppingadreef, paid back to HP. As such, Foppingadreef would generate at least $178 million (€139 million) in tax savings that are not allowed.
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