8-KOther Events

Johnson Controls International plc 8-K Report, Corporate Update (Jul 1, 2013)

Filed July 1, 2013For Securities:JCI

Summary

Johnson Controls International plc (JCI) disclosed on July 1, 2013, that it received Notices of Deficiency from the IRS concerning historical tax years of former Tyco International subsidiaries (1997-2000). The IRS is asserting additional taxes of $883.3 million plus $154 million in penalties, related to the disallowance of approximately $2.86 billion in intercompany debt deductions. The company strongly disagrees with the IRS's position and intends to contest the proposed adjustments in U.S. Tax Court, believing it has strong defenses. While the company states no payments are due until the dispute is resolved, which could take years, a negative outcome could materially impact JCI's financial condition, results of operations, and cash flows. Notably, if the IRS's position is upheld, it could also lead to the disallowance of an additional $6.6 billion in interest deductions in subsequent periods. The company also detailed its tax-sharing agreements with Covidien, TE Connectivity, ADT, and Pentair, which would allocate a portion of any potential liabilities to these entities.

Key Highlights

  • 1IRS has issued Notices of Deficiency for former Tyco subsidiaries, asserting $883.3 million in additional taxes and $154 million in penalties for tax years 1997-2000.
  • 2The core of the dispute centers on the IRS's disallowance of $2.86 billion in intercompany debt interest deductions.
  • 3JCI strongly disputes the IRS's position and plans to challenge the assessment in U.S. Tax Court.
  • 4Resolution of this tax dispute could take several years, and no payments are immediately required.
  • 5An unfavorable outcome could materially impact JCI's financial condition, results of operations, and cash flows.
  • 6Potential disallowance of $6.6 billion in future interest deductions if the IRS prevails on the current issue.
  • 7Significant tax-sharing agreements are in place with Covidien, TE Connectivity, ADT, and Pentair, which will allocate a portion of any tax liabilities.

Frequently Asked Questions

The IRS has asserted that former U.S. subsidiaries of Tyco International should not have treated certain intercompany debt as valid debt for tax purposes during the 1997-2000 tax years, disallowing approximately $2.86 billion in related interest deductions.

Johnson Controls strongly disagrees with the IRS's position, believes it has meritorious defenses, and intends to file petitions in the U.S. Tax Court to contest the proposed adjustments.

While JCI believes its current tax reserves are appropriate, an unfavorable resolution could materially impact its financial condition, results of operations, and cash flows. There is also a risk of an additional $6.6 billion in future interest deductions being disallowed if the IRS's current position is upheld.

JCI has tax-sharing agreements with Covidien, TE Connectivity, ADT, and Pentair. These agreements stipulate that Covidien and TE Connectivity will share portions of the liability based on the 2007 agreement, and ADT and Pentair will share portions based on the 2012 agreement, depending on the total amount of the liability.