Zachary R. Mider
Bloomberg
August 6, 2014 - 12:34 am ET
WASHINGTON -- President Barack Obama says U.S. corporations that adopt foreign addresses to avoid taxes are unpatriotic. His own administration helped one $20 billion American company do just that.
As part of the bailout of the auto industry in 2009, Obama's Treasury Department authorized spending $1.7 billion of government funds to get a bankrupt Michigan parts-maker back on its feet -- as a British company.
While executives continue to run Delphi Automotive from a Detroit suburb, the paper headquarters in England potentially reduces the company's U.S. tax bill by as much as $110 million a year.
The Obama administration's role in aiding Delphi's escape from the U.S. tax system may complicate the president's new campaign against corporate expatriation.
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Thanks to gaps in a Congressional ban on contracts with inverted companies, his administration continues to award more than $1 billion annually in government business to more than a dozen corporate expats.
IRS case
The Obama administration is now trying to rescind the tax benefits of the Delphi deal that it helped broker.
In June, the Internal Revenue Service told Delphi that the 2009 address change should be disregarded for tax purposes, and that Delphi must pay taxes as a U.S. company.
Delphi says in a securities filing that it will "vigorously contest" the IRS's demand.
"The recent rise in inversion transactions has the IRS and Treasury and the president understandably rattled, so they're now trying to play catch up," said Julie Roin, a tax professor at University of Chicago Law School. "They were worried about other things in 2009."
U.S. companies have been inverting for decades. The pace of departures began to quicken about two years ago, as a series of drugmakers sought to become Irish. The issue caught the attention of lawmakers and the Obama administration this year.
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Rescue loans
Facing the worst car market in decades, GM and Chrysler were themselves running out of cash. Some officials said they feared an economic catastrophe if the automakers were forced to liquidate and put hundreds of thousands out of work.
In December 2008, the outgoing Bush administration approved $17.4 billion in rescue loans for GM and Chrysler. In February, Obama assembled a task force led by Steven Rattner, a Wall Street financier, to oversee the bailout.
The Treasury task force had broad authority at the automakers, because the terms of the government loans propping them up gave it veto power over major decisions. One of the team's first jobs was to fix Delphi.
GM still depended on its former subsidiary for crucial parts like steering assemblies. A liquidation of the supplier could end up shutting down many of GM's assembly lines, too. But the team members didn't want GM to dump money into Delphi indefinitely.
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Tax-friendly Luxembourg
He doesn't mention one detail of the transaction that was disclosed three weeks after the Platinum agreement in a public court filing: Platinum was considering registering the new Delphi in tax-friendly Luxembourg rather than in the U.S.
The following month, Platinum took steps to carry out the plan, dispatching lawyers to register two Luxembourg entities. Both bore the name Platinum used for its Delphi project: Parnassus, the mountain in Greece where, according to legend, the oracle of Delphi issued her prophecies.
Meanwhile, GM made its own trip through bankruptcy court to shed its debts. On July 10, 2009, it emerged under the formal control of the Treasury Department, which had swapped some of its debt for stock and now held 61 percent of the shares. [So is this like a govt takeover?]
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Platinum out
The deal with Platinum soon ran into trouble. Creditors including Elliott Management, the hedge fund run by New York billionaire Paul E. Singer, said Platinum was buying the company too cheap. [Singer's the Argentina vulture hedge fund guy.]
So Elliott and another hedge fund, Greenwich, Connecticut-based Silver Point Capital LP, put in their own bid for the company, offering to swap their debt for new shares. On July 26, 2009, they agreed with GM to cut Platinum out of the deal.
In some ways, the Elliott deal was similar to the one Rattner's task force approved the previous month.
GM would provide crucial financing for the new company -- a $1.7 billion direct investment in its equity, making it a shareholder alongside the hedge funds. GM would also buy the steering business and other assets for about $1.1 billion.
All this spending would depend on the Treasury Department's approval. After it emerged from bankruptcy, GM ended up with $16 billion of Treasury Department funds in a special escrow account that could be tapped only with the government's blessing.
Another detail remained the same as well: GM and the hedge funds agreed to register the new Delphi in Luxembourg or another, mutually agreeable foreign country.
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Lower corporate taxes
Along with Ireland and the Netherlands, the United Kingdom is becoming increasingly popular with companies seeking to flee the U.S. system. In addition to Pfizer, AbbVie Inc., an Illinois drugmaker with a market value of about $85 billion, announced plans last month to become a U.K. taxpayer.
The United Kingdom not only has a lower corporate tax rate -- 21 percent -- than the United States, but it taxes companies only on their domestic earnings.
U.S. companies must pay taxes on the profits of their foreign operations -- a major hindrance for Delphi, whose factories are spread around the world.
Judge Robert Drain, who approved the sale in bankruptcy court, declined to comment. Spokesmen at Elliott and Silver Point also declined to comment, and Mark Barnhill, a partner at Platinum, didn't respond to requests for comment.
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Hedge funds win
The Delphi takeover proved to be a huge win for the hedge funds, and for Treasury-controlled GM.
Stripped of its debts and its U.S. tax domicile, the company surged in value. GM sold its stake back to Delphi in 2011, recognizing a $1.6 billion after-tax gain. Elliott did even better, according to the New York Post. Singer's fund turned a $300 million investment into $1.3 billion by the time Delphi sold shares to the public that year, the Post reported at the time. [OMG!!]
After Delphi got its New York Stock Exchange listing in 2011, its stock continued to advance. With a market capitalization of about $20 billion, it's now among the biggest and most profitable U.S. corporate expatriates.
Going public required Delphi to switch from partnership to corporate form. Becoming a U.K. corporation, though, would have required an accounting change that could have threatened its eligibility for inclusion in the Standard and Poor's 500 Index of the largest U.S. companies.
Instead, Delphi incorporated in the tiny English Channel island of Jersey, a self-governing Crown dependency that didn't require the accounting change.
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EU-NATO IMPERIALISM ❌ 
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