Using swaps to repatriate earnings does not work, the IRS said.

Most US companies that invest in offshore power plants and other infrastructure projects structure the investments so that US taxes can be deferred for as long as the earnings remain offshore. This requires investing through an offshore holding company in a tax haven. Over time, earnings build up and must be reinvested in other offshore projects. Tax directors at many US utilities are under pressure to come up with ways to bring earnings back to the US without triggering US taxes.

One US parent recently entered into a complicated series of swap transactions with a bank. It then assigned its right to receive payments under the swap to a foreign subsidiary in exchange for an upfront cash payment from the subsidiary. The IRS said in a recent “field service advice” — or memo from the national office to an agent in the field — that the transactions lacked any business purpose and were in reality loans from the foreign subsidiary to the US parent. A loan of offshore earnings back to the US parent triggers immediate US taxes under section 956 of the US tax code.