Investor Presentaiton
Brazil Tax Years 2005-2012
The Company has two Brazilian tax cases primarily relating to the amortization of certain goodwill generated from the
acquisition of third-party businesses and corporate reorganizations. One case involves tax years 2005-2008 (Case 1), and the
other involves tax years 2009-2012 (Case 2). Case 2 is proceeding on a more accelerated timeline than Case 1. For Case 2, the
Company received a tax assessment in 2014 that included interest and penalties. In November 2019, the Company received an
unfavorable result at the final tax administrative appeals level, resulting in an alleged tax deficiency of $27 million plus
$102 million of interest and penalties (translated at the December 31, 2022 exchange rate). The Company is challenging this
assessment in the judicial system and, on April 18, 2022, received an unfavorable decision at the first judicial level. On April
27, 2022, the Company filed a motion for clarification relating to that decision. On May 20, 2022, the court largely upheld its
prior decision without further clarification. On June 9, 2022, the Company filed its notice of appeal to the second level court.
The Company intends to continue its challenge of this assessment in the judicial system.
As previously disclosed for Case 1, the Company received a separate tax assessment alleging a tax deficiency of $31 million
plus $110 million of interest and penalties (translated at the December 31, 2022 exchange rate), which the Company is
challenging in the judicial system. This case is still pending resolution at the first judicial level.
Both cases are expected to take several years to resolve through the Brazilian judicial system and require provision of
certain assets as security for the alleged deficiencies. As of December 31, 2022, the Company pledged Brazilian real estate
assets with net book value of $19 million and provided additional security in the form of bank secured bonds and insurance
bonds totaling $116 million and a cash deposit of $18 million (translated at the December 31, 2022 exchange rate).
United States Tax Disputes
The IRS typically audits large corporate taxpayers on a continuous basis, generally resulting in many open tax years if there
are disputed tax positions upon completion of the audits. The IRS has completed its examination of the consolidated income tax
returns of the Company's United States subsidiaries (Eaton US) for 2005 through 2016 and the statuses of the various tax years
are discussed below. The IRS has challenged certain tax positions of Eaton US, and the Company is attempting to resolve those
issues in litigation and the IRS administrative process, as described in more detail below. The IRS is currently examining tax
years 2017 through 2019, and the statute of limitations for those years is open until December 31, 2024. Tax years 2020 and
later are subject to future examination by the IRS. Income tax returns of states and localities within the United States will be
reopened to the extent of United States federal income tax adjustments, if any, going back to 2005 when those audit years are
finalized. The Eaton US tax positions challenged by the IRS are items that recur beyond the tax years for which the IRS has
proposed adjustments. Eaton believes that its interpretations of tax laws and application of tax laws to its facts are correct.
However, if there is a final unfavorable resolution of any of the issues discussed below, it may have a material adverse impact
on the Company's consolidated financial statements.
U.S. Tax Years 2005-2006
In 2011, the IRS issued a Statutory Notice of Deficiency for Eaton US for the 2005 and 2006 tax years (the 2005-06 Notice),
which Eaton US contested in United States Tax Court. The 2005-06 Notice proposed assessments of $75 million in additional
taxes plus $52 million in penalties related primarily to transfer pricing adjustments for products manufactured in the Company's
facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the United States. Eaton US
has set its transfer prices for products sold between these affiliates at the same prices that Eaton US sells such products to third
parties as required by two successive Advance Pricing Agreements (APAs) Eaton US entered into with the IRS that governed
the 2005-2010 tax years. Eaton US has continued to apply the APA pricing methodology for 2011 through the current reporting
period. Immediately prior to the 2005-06 Notice being issued, the IRS sent a letter stating that it was retrospectively canceling
the APAs. The case in Tax Court involved whether the IRS improperly cancelled the APAs. On July 26, 2017, the Tax Court
issued a ruling in which it agreed with Eaton US that the IRS must abide by the terms of the APAs for the tax years 2005-2006.
The Tax Court's ruling on the APAs did not have a material impact on Eaton's consolidated financial statements. On May 24,
2021, the IRS filed a notice to appeal the Tax Court's ruling to the United States Sixth Circuit Court of Appeals. On August 25,
2022, the Sixth Circuit issued a ruling in favor of Eaton US, confirming that the IRS must abide by the terms of the APAs. The
Sixth Circuit's ruling did not have a material impact on the Company's consolidated financial statements and resolves U.S. tax
years 2005-2006.
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