By on August 6, 2014


From Bloomberg’s Zachary Mider comes a new allegation regarding the restructuring of (formerly) American parts maker Delphi: the Treasury Department under Obama helped the company re-incorporate in England as part of a tax avoidance strategy. If that’s true, it’s an embarrassing revelation for a President who recently condemned American companies that incorporate abroad as “corporate deserters.” Like many things in the financial world, however, appearances are often deceiving.

As Mider explains, Delphi was spun off from GM in 1999 in an attempt to diversify the part’s division’s clientele and make it more globally competitive. The move didn’t pan out; by 2005 Delphi was in bankruptcy court, where it scraped along until the 2009 financial crisis. The Great Recession made Delphi’s situation acute; if GM collapsed, the parts company had no hope of surviving. Conversely, GM needed the company to keep supplying it with crucial parts. After the bailout package for GM was approved in the waning days of the Bush Administration, Treasury officials understood that Delphi would need to be recapitalized as well. Steven Rattner, the Wall Streeter appointed by President Obama to oversee the bailout of GM, helped broker a deal to “fix” Delphi by getting the company out of bankruptcy court.

Initially, the hedge fund Platinum Equity LLC of Los Angeles agreed to divvy up Delphi’s assets with GM, with the newly Treasury-backed carmaker providing the majority of the financing (Treasury money) for the deal. However, the agreement with Platinum fell through when another one of Delphi’s creditors, the hedge fund Elliot Management, objected to the terms of the deal. Elliot and the firm Silver Point Capital partnered to put together their own bid for Delphi, which GM agreed to. GM invested $1.7 billion into Delphi’s equity, and bought out its steering parts business and a few factories for a further $1.1 billion. All of this money came from an escrow account filled with $16 billion in bailout money set up after GM emerged from bankruptcy, and all the spending required Treasury Department approval before it could go forward. There was one small catch in the fine print of the deal: GM and the hedge funds would reincorporate Delphi in some foreign country, ostensibly to obtain a better tax position. Mider explains that this practice, known as “inversion,” is becoming increasingly common amongst U.S.-based companies seeking a more favorable tax climate. Delphi was incorporated in England for that purpose, and the money was disbursed from the Treasury escrow account after the reincorporation was complete. The original agreement with Platinum didn’t contain language about foreign reincorporation, although it later emerged that the fund’s lawyers had set up two paper companies in Luxembourg for that purpose.

The deal between Elliot, Silver Point, and GM to rescue Delphi turned out to be a great investment for all parties involved. After Delphi went public again in 2011, the stock price surged. GM sold its stake back to Delphi for a $1.6 billion profit, and Elliot Management booked $1.3 billion on an initial investment of $300 million. At this point, GM was under no obligation to pay the Treasury anything. The terms of the bankruptcy meant that all of the Treasury’s debt had been swapped for equity in the “new” carmaker. The U.S. Government wouldn’t see a dime of GM’s profits from the Delphi deal, besides any increase in the market value of its equity stake. And it had been cut out of a large chunk of the tax revenue from Delphi, which was now headquartered in England under more favorable rules.

The question becomes who knew what, when, and how much leverage the Treasury had to exert on the terms of the deal with Elliot and Silver Point. The time window for the agreement is key. GM’s bankruptcy proceedings concluded on July 10, 2009. Steven Rattner and the rest of the bailout task force stepped aside, believing their jobs were finished. But the collapse of the Platinum deal happened soon afterwards, because some of Delphi’s creditors weren’t satisfied with the terms. The deal between Elliot, Silver Point, and GM was inked on July 26. When interviewed by Bloomberg, Rattner claimed to have no knowledge of any plan to incorporate Delphi in a foreign locale at the time of the original negotiations. Even if he had, it’s not likely that he would have been able to stop it. Because the Treasury never technically held a direct stake in Delphi (unlike its assumption of equity in GM’s case), it was only an indirect party to the final settlement of Delphi’s bankruptcy proceedings. Rattner had denied a $150 million cash infusion from GM to Delphi previously, when it became clear that transfer wouldn’t end Delphi’s bankruptcy proceedings. The Treasury could have rejected disbursement of funds for GM’s investment in the parts maker after the reincorporation of Delphi in England. But that would have iced the deal and put Delphi’s future in jeopardy, which in turn would have been counterproductive to the purpose of the bailout in the first place. Even so, it’s not a proud moment in the management of the bailout by any stretch of the imagination.

The other factor to consider is that Rattner and the bailout task force may have believed that Delphi’s reincorporation wouldn’t affect its tax position after all. Mider reports that in September of 2009, the IRS notified Delphi that it was still considered a U.S. company and would be subject to U.S. corporate income tax rates. As a justification, the IRS cited a 2004 law meant to prevent exactly what Delphi had done: the creation of paper “surrogate foreign corporations” for the purposes of evading taxes. The IRS dispute with Delphi in this case is ongoing. If the company loses its appeal, it would owe about 20 percent more a year in taxes than it pays now (as well as any assessments for back taxes). If that’s the case, then the “inversion” of Delphi will be a moot point.

The broader takeaway from the whole saga is that any intervention by government in the spaces normally served by private equity is bound to have some unpleasant side effects. Simultaneously trying to manage, regulate, and tax a business is bound to produce more than a few conflicts of interest. At the very least, the Delphi deal embarrasses an Administration which has recently sought to turn up the heat on companies moving their headquarters abroad. It’s unlikely to change many minds about the wisdom of the bailout; those lines were drawn firmly some time ago. But the curious case of Delphi’s “inversion” will undoubtedly be cited in future debates about corporate tax reform in America, from both a left and a right-wing perspective.

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17 Comments on “Did Obama Administration Help Delphi Evade U.S. Taxes?...”

  • avatar

    87,000 pages of tax code and it was written by the lawyers and CPA’s. We are too stupid to know what to feed our kids but try making a mistake to the IRS.

    While Rattner may claim ignorance that seems to be the standard excuse for everything this admin fouls up. The IRS commissioner just said he does not know what is done in his department. Holder did not know anything about anything (bad) Hillary can’t explain her achievements

    In the end the taxpayers get the bill and the favored class of whoever is in office get the cookies. In this case the hedge funds and the UAW. The white collar union at Delphi was shown the door with almost nothing.

    • 0 avatar

      So long as those who pay the tab are left in the minority, absolutely nobody (in the majority) cares.

    • 0 avatar

      J. Emerson’s article was a revelation to me. I had no idea!

      But Walgreen’s announced today that it would keep its HQ in the US instead of moving overseas to reduce its tax burden.

      Obviously, Delphi wanted to reduce its tax burden. And the O*ama administration sanctioned it even though O* supposedly hates these corporate moves more than anything else and calls the companies who move unpatriotic and threatens to use an Executive Order to outlaw the practice.

      But hey, majority rules! This is what the majority in America wanted. This is what the majority voted for. Not just once, But twice!

      I say, let them pay for it.

      The rest of us just have to suck it up and deal with it. Or find a way to not pay taxes.

      Not farfetched. There are 12-15 million illegal aliens living in America who don’t pay any income, soc sec, or state taxes because they don’t file.

      And that’s not counting the millions of Americans who don’t make enough money to file either.

      • 0 avatar

        ” There are 12-15 million illegal aliens living in America who don’t pay any income, soc sec, or state taxes because they don’t file.”

        This is one of the biggest myths proliferated by the Fox News crowd regarding illegal immigration.

        The IRS has been issuing ITINs to illegals and non-citizens (those without a SS#) since 1996. Illegals in the US paid $11.2 billion in income, property, and sales taxes in 2010 alone.

        Don’t bother, I know, you think it’s BS, you don’t believe the numbers, it’s all a liberal conspiracy, whatever. Don’t take my word for it, do your own research and decide for yourself.

        • 0 avatar

          First, you’re lumping state sales and property taxes which generally can’t be avoided in with the federal income taxes which can.

          Second, even after doing that you’ve gotten up to what, two bucks per illegal per day? That’s in the order of 9-10 cents on the dollar against their direct burden on social services.

          ITIN is primarily used by these people to file for the various state and federal child tax credits. In 2010, federal returns using an ITIN paid 870 million in taxes and received 4 billion dollars in “refunds”.

          It’s exactly BS.

          • 0 avatar

            Easy there, Sparky, I was responding to HDCs assertion that illegals pay no taxes whatsoever (and he’s the one who brought state taxes into it).

            You’re so busy defending your political agenda that you completely missed that I merely stated a few facts, facts that you yourself have not disputed.

            Every year somewhere between 45% and 50% of Americans with SS#s pay no federal income tax – that’s right, zero. You really want to go there?
            And fwiw, everything you mentioned about social services, child tax credits, and income tax avoidance also applies directly to low income and self-employed US citizens with SS#s. They constitute just as much of a disproportionate burden on the revenue base as illegals do.

            I find it endlessly amusing that the most rabid conservatives, the ones who are always saying that govt is too big and taxes are too high, are the same ones whining about illegals not “paying their fair share”.

        • 0 avatar

          hybridkiller, if an illegal alien has a T.I.N then they are no longer illegals. H1B aliens fall into that category. People crossing the Rio Grande do not.

          It means that they have come out and registered with the Feds and State government to get a T.I.N.

          It means that they can be accounted for. And they do pay income taxes if they are employed, also qualify for foodstamps, WIC and MedicAid.

          I was referring to the more than 15 million illegals scattered all over the US who are not registered anywhere and have no T.I.N.

          A lot of them come through New Mexico, where I live, and we help them move on to the uber-liberal Blue States by issuing them a drivers license so they can vamoose!

          Even the Mexican-Americans in New Mexico and Texas have had their fill of illegal aliens.

          Then again this is the new America, money for nuttin’ with foodstamps and welfare for free.

          Give us your tired, your poor, your huddled masses…… living 50 to a single family dwelling.

          • 0 avatar

            “…if an illegal alien has a T.I.N then they are no longer illegals.”

            Dude, I don’t think you understand what an ITIN is (not a T.I.N., that’s not the same thing). One of the main reasons it was established in the first place was to encourage undocumented/illegal immigrants to pay income tax. It has no other purpose than as a tax ID# for people not eligible for a SS#. It provides NO legal status with regard to a person living in the US. The IRS does not share ITIN personal information with ICE or any other fed agencies. The IRS themselves, as well as most analysts, believe that the vast majority of people using ITINs are here illegally.

            I could link you to plenty of legitimate sources to confirm all of this, but none of them are Fox News so you probably wouldn’t be interested anyway.

        • 0 avatar

          What I find endlessly amusing is how angry liberals are 24/7.

          • 0 avatar

            TomHend, as you already know I am an Independent with equal disdain for both Republicans and Democrats.

            But I only reply to the angry uninformed jabs of hybridkiller because I do have a daughter-in-law who made it across the Rio Grande. Once she married my son, she had to become a Naturalized US citizen so he could keep his Commission in the US Army and be given a security clearance.

            However, her parents, brothers and sisters, NEVER chose to become US citizens but lived and worked here, and when they had made their money after 30 years of freeloading in America, they moved back to Chihuahua. Not once did any of them pay any income taxes in the US.

            My son retired as a Lt Col and is now a Supervisory Border Patrol Agent in Southwest Texas who lives the illegal alien nightmare 24/7.

            What hybridkiller overlooks is the millions of illegal aliens who do not have any kind of taxpayer identification number, have not come out of hiding for an ITIN, and continue to live and work in the underground economy, or use a stolen ssan as their own.

            And that is the difference between uber-left idealists like hybridkiller and the real-world Border Patrol and ICE people who live the life 24/7/365.

            For all, I rarely watch TV, no Fox News, no MSNBC. I haven’t got time for endlessly watching TV.

            I have a life, and illegal aliens play a big part in my life because I hire them, pay them real money, have sold some of them a used car, and helped them with directions to get to Blue States. We in New Mexico can’t afford them because we are a poor state, so we help them on their merry way to a Blue State to spread the burden around.

            Works for us!

  • avatar
    SCE to AUX

    I don’t care if they evaded taxes by legal means.

    • 0 avatar

      “I don’t care if they evaded taxes by legal means.”

      Don’t you mean ‘avoided’ taxes by legal means?

      The still pay taxes, just not on the foreign income and profits, which is what the US also wants them to pay taxes on, both foreign and domestic, to the tune of ~40%.

      Avoiding taxes is legal. Anyone with half a brain can do it. Evading taxes is illegal.

      • 0 avatar
        SCE to AUX

        You are correct; I chose the wrong word.

        But many people see no distinction, wanting everyone to ‘pay their fair share’.

        I avoid taxes; it’s one reason I moved out of the adjacent county.

    • 0 avatar

      “What hybridkiller overlooks is the millions of illegal aliens who do not have any kind of taxpayer identification number, have not come out of hiding for an ITIN, and continue to live and work in the underground economy, or use a stolen ssan as their own.

      And that is the difference between uber-left idealists like hybridkiller and the real-world Border Patrol and ICE people who live the life 24/7/365.”

      With all due respect, you know nothing about my political views as, unlike you, I merely stated a few facts in response to some of your assertions which were, strictly speaking, not factually correct (I’m not the uninformed one here). You’re making the same mistake Dan did – you read a political agenda into my remarks because they upset your tidy little simplistic ideology.
      FWIW, I leave the debate about how to solve the immigration problem to others – it’s way more complicated of an issue than you make it seem and frankly I’m past the age of worrying about the future of our society – I leave that to younger, more energetic people to deal with.

      You appear to have a need to paint people with a broad brush – evidently people who challenge your remarks are “uber-left idealists”, illegal immigrants are all (and I’m paraphrasing here) lazy, dishonest and nothing but a burden to society. Unfortunately very few things in this world are that black-and-white simple, and your inability to accept that means you will never be able to make a convincing argument to anyone who doesn’t already agree with you. But I suspect you’re just fine with that.

      As Pat Moynihan famously said, “Everyone is entitled to his own opinion, but not to his own facts.”

  • avatar

    Excellent article.

  • avatar

    Yep, the Elliott vultures running Delphi bent the Obama administration over a barrel and made BANK on their initial investment. “You want to rescue GM? Give us what we want or have fun building cars without steering columns.” The administration caved completely.

    These are the same guys currently holding Argentina hostage over their defaulted bonds.

    And in a delicious little bit of serendipity, a certain Mrs. Ann Romney had a big investment in Elliott during this time, meaning that Ann and Mittens likely made millions on the bailout. This was likely one of the reasons Mitt refused to release all his tax returns. Google “Mitt Romney’s Bailout Bonanza” for more detail.

    • 0 avatar

      The fundamental rule of mankind is:

      “The strong do as they please while the weak accept what they must.”

      -Courtesy of Thucydides account of the Melian Dialogue.

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