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Nortel Settles Dispute With IRS

by Leroy Baker,, New York

29 December 2009

Nortel Networks Corp (NNC), a Canadian producer of communications equipment in bankruptcy since January 2009, has issued a statement which includes the status of the US Internal Revenue Service (IRS) USD3bn tax claim filed against its US subsidiary Nortel Networks Inc (NNI). This proof of claim will be withdrawn as part of a wider agreement.

In consideration of a settlement payment of USD37.5m, the IRS has agreed to release all of its claims against NNI and other members of NNI's consolidated tax group for the years 1998 through 2008. As a result of this settlement, the IRS has agreed to withdraw its proof of claim against NNI on disputed transfer pricing procedures amounting to approximately USD3bn.

The wider agreement is called a "Final Canadian Funding and Settlement Agreement" between NNC, NNI, the UK subsidiary Nortel Networks Limited (NNL), together with other Canadian and US subsidiaries that have filed for creditor protection in Canada or the US. This Agreement provides for the settlement of intercompany claims, including amounts owed by NNL to NNI under Nortel's transfer pricing arrangements for the years 2001 through 2005.

As part of the settlement, NNL has agreed to the establishment of a pre-filing claim in favor of NNI in the Canadian creditor protection proceedings in the net amount of approximately USD2.063bn, which claim will not be subject to any offset.

The Agreement also provides that NNI will pay to NNL approximately USD190m over the course of 2010, which amount includes the contribution of NNI and certain US affiliates towards costs incurred by NNL on their behalf for the duration of the creditor protection proceedings.

The Agreement additionally provides for the allocation of other costs to be incurred by the parties, including those relating to the divestiture of Nortel's various businesses.

The Agreement is subject to NNL and NNI entering into advance pricing agreements with the Canadian and US tax authorities to resolve certain transfer pricing issues, on a retrospective basis, for the taxable years 2001 through 2005; court approvals in the US and Canada are also required.

According to documents filed with the bankruptcy court, and reported on by the international media, the firm's transfer pricing policy "reflected that certain Nortel affiliates are the source of the R&D that has created Nortel's global technology footprint".

The allocation of profit or loss was said to be based on each affiliate's relative share of certain R&D and other overhead costs.

This comprehensive report in our Intelligence Report series examines the global and national landscapes in which companies can use transfer pricing to improve their after-tax returns, including summaries of recent developments in design of the corporate supply train, the usefulness of 'offshore' in international corporate tax planning, and a section covering the spread of DTAAs and CFC laws. It is available in the Lowtax Library at and a description of the report can be seen at

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