ScottishPower in US tax fight win

City Editor

Thursday 21 June 2012

GLASGOW-based energy provider ScottishPower has secured an important win over the US taxman on the structuring of a 1999 deal to purchase American utility PacifiCorp in a case that could have landed it with a multimillion-dollar tax bill.

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TIM SHARP

The dispute was the legacy of ScottishPower's brief but troubled foray into the American market, which sparked a case that tested whether a company can use a mixture of debt and equity in a takeover bid.

The Internal Revenue Service (IRS) challenged $932 million (£594m) in interest deductions taken by the Scottish Power on $4 billion of debt issued between different company units. The IRS argued the deals should be treated as equity, which would nullify the tax breaks, leaving ScottishPower owing $188m in federal income taxes for the tax years 2001 to 2003. In the culmination of a case that has been running for around a decade, the Tax Court in Washington said the Government did not prove its case and ruled the deductions legal. "We recognise that there are features in this case pointing to both debt and equity," the Tax Court said in its ruling. "Nevertheless we find that the advance was more akin to debt than equity." The £4.7bn takeover of Pacificorp, which was completed on St Andrew's Day 13 years ago, was the biggest takeover of a foreign company by a Scottish firm. But the transaction proved ill-fated. ScottishPower sold PacifiCorp at a near-£1bn loss to legendary US investor Warren Buffett in 2005 and a year later was itself swallowed by Spanish utility Iberdrola. The case laid bare the complex means by which takeovers are structured. At the centre of the ScottishPower case was NA General Partnership, a Nevada partnership which was indirectly owned by ScottishPower. It in turn formed a subsidiary corporation ScottishPower Acquisition which served as the acquirer of PacifiCorp. NAGP then issued fixed-rate notes to ScottishPower. ScottishPower had to prove to the court that the loans were genuine and that it expected repayment, even though the IRS cited missed interest payments by NAGP in its argument. The judge's relatively lenient interpretation of the relationship between inter-company creditors and debtors is important because interest expenses on debt are deductible in the US, and the model used by ScottishPower is common in corporate transactions.

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ScottishPower in US tax fight win

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