Investor Presentaiton
U.S. Tax Years 2007-2010
In 2014, the IRS issued a Statutory Notice of Deficiency for Eaton US for the 2007 through 2010 tax years (the 2007-10
Notice), which Eaton US contested in Tax Court. The 2007-10 Notice proposed assessments of $190 million in additional taxes
plus $72 million in penalties, net of agreed credits and deductions. The proposed assessments pertain to: (i) the same transfer
pricing issues and APA for which the Tax Court and Sixth Circuit have issued favorable rulings to Eaton as noted above; and
(ii) the separate proposed assessment noted below. The Company believes that the Sixth Circuit Court of Appeals ruling
discussed above for tax years 2005-2006 should also resolve the APA cancellation issue for the 2007-2010 years. Eaton and the
IRS have recognized that the ruling on the enforceability of the APA did not address a secondary issue regarding the transfer
pricing for a certain royalty paid from 2006-2010. Eaton US reported a consistent royalty rate for 2006-2010. The IRS has
agreed to the royalty rate as reported by Eaton US in 2006. Although the IRS has not proposed an alternative rate, it has not
agreed to apply the same royalty rate in the 2007-2010 years.
The 2007-10 Notice also includes a separate proposed assessment involving the recognition of income for several of Eaton
US's controlled foreign corporations. The Company believes that the proposed assessment is without merit and contested the
matter in Tax Court. In October 2017, Eaton and the IRS both moved for partial summary judgment on this issue. On February
25, 2019, the Tax Court granted the IRS's motion for partial summary judgment and denied Eaton's. The Company intends to
appeal the Tax Court's partial summary judgment decision to the United States Sixth Circuit Court of Appeals. The total
potential impact of the Tax Court's partial summary judgment decision on the controlled foreign corporation income recognition
issue is not estimable until all matters in the open tax years have been resolved.
U.S. Tax Years 2011-2013
In 2018, the IRS completed its examination of Eaton US for tax years 2011 through 2013 and proposed adjustments. Those
adjustments were the subject of administrative appeals, which recently concluded without resolution. As a result, on December
21, 2022, the IRS issued Statutory Notices of Deficiency for Eaton US for these tax years (the 2011-2013 Notice) proposing
assessments of $749 million in additional taxes plus $110 million in penalties, net of agreed credits and deductions. The
proposed assessments pertain to: (i) transfer pricing adjustments similar to those proposed in the 2005-06 and 2007-10 Notices
for products manufactured in the Company's facilities in Puerto Rico and the Dominican Republic and sold to affiliated
companies located in the U.S.; (ii) adjustments involving the recognition of income for several of Eaton US's controlled foreign
corporations; (iii) transfer pricing adjustments for products manufactured in one of the Company's facilities in Mexico and sold
to affiliated companies located in the U.S.; and (iv) adjustments challenging the appropriate interest rate on intercompany debt
and amount of intercompany fees charged for financial guarantees on external debt. The Company will file its petition to the
U.S. Tax Court on or before March 6, 2023, and will vigorously defend its positions through litigation, which will take several
years for final resolution.
U.S. Tax Years 2014-2016
In 2021, the IRS completed its examination of Eaton US for tax years 2014 through 2016 and has proposed adjustments,
including: (i) transfer pricing adjustments similar to those proposed in the 2005-06, 2007-10, and 2011-2013 Notices for
products manufactured in the Company's facilities in Puerto Rico, and the Dominican Republic and sold to affiliated companies
located in the U.S.; (ii) transfer pricing adjustments similar to those proposed in the 2011-2013 Notice for products
manufactured in one of the Company's facilities in Mexico and sold to affiliated companies located in the U.S.; and (iii)
adjustments similar to those proposed in the 2011-2013 Notice challenging the appropriate interest rate on intercompany debt
and amount of intercompany fees charged for financial guarantees on external debt. On November 29, 2021, the case was
formally assigned to administrative appeals, and the Company will attempt to resolve certain of the issues in this administrative
forum. However, if acceptable resolutions are not achieved, the Company will vigorously defend its positions through litigation,
which if undertaken will likely take several years for final resolution. The statute of limitations on these tax years currently
remains open until December 31, 2024.
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