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Medtronic deal puts an emphasis on tax savings

First Published      Last Updated Jun 17 2014 10:49 am

To invest in the United States, Medtronic says it needs to move to Ireland.

The medical device-maker plans to reincorporate in Ireland as part of a $42.9 billion acquisition of its rival Covidien.

With the deal, announced Sunday, the Minneapolis-based Medtronic becomes the latest — and biggest — U.S. company to try to change its tax domicile through a so-called inversion. Such deals are attractive to U.S. companies seeking a lower corporate tax rate.

Medtronic, however, says its purpose is much broader than that: It's about accessing billions in cash trapped overseas.

Such huge cash piles are an issue for every U.S. multinational, which have a total of nearly $2 trillion parked overseas, according to Bloomberg. Those companies, like Medtronic, are reluctant to use the money in the U.S., because doing so would require paying a tax of as much as 35 percent.

As the amount of money overseas continues to grow, Wall Street and some Washington lawmakers have proposed a temporary tax holiday, which would allow companies to bring back overseas cash. Companies like Medtronic are not waiting for relief.

"The only reason they're doing the inversion is to free up the cash overseas," Bill George, Medtronic's former chief executive, said in an interview. "That money today can't be put to good use right now."

Still, acquiring Covidien will not solve Medtronic's problems immediately. While Medtronic can use its overseas cash to finance its purchase of Covidien, its current overseas cash pile will otherwise remain taxable upon repatriation, as will future foreign earnings from the current Medtronic businesses.

But Covidien's overseas cash and the future foreign earnings from its businesses will not be subject to U.S. repatriation taxes, giving the enlarged Medtronic a new source of cash it can use freely. That will bring the amount of Medtronic's "trapped" offshore cash down to about 40 percent of its total cash, from 60 percent as a stand-alone firm.

"The combined company should generate significant free cash flow, which can be deployed with much greater flexibility," Medtronic's chief executive, Omar Ishrak, said in a conference call with analysts Monday.

Medtronic said it planned to use its strengthened balance sheet to invest $10 billion in the U.S. during the next 10 years, a move apparently intended both to appease critics of inversions, and to emphasize the importance of the U.S. for the medical device industry.

This did not appease critics, who say that inversions should be halted no matter what their motive.

"Any company who is paying U.S. taxes today should expect to pay U.S. taxes for years to come regardless of how they try to game the system," said Sen. Ron Wyden of Oregon, the Democratic chairman of the Senate Finance Committee.

To others, the fact that such a large company was trying an inversion made the need for corporate tax reform even more urgent.

"Announcement of this transaction is further evidence the U.S. Congress should act to either enact corporate tax reform, or if that is not possible, significantly restrict inversions for some period of time to give Congress time to enact corporate tax reform," said J. Richard Harvey, a professor at Villanova University Law School.

With few exceptions, companies are reluctant to repatriate overseas cash and hand over 35 percent to the Treasury. EBay was one of the first big companies to take the tax hit in April, when it brought back $9 billion in overseas cash, paying more than $3 billion in taxes.

Though Medtronic will not be able to repatriate its current overseas cash without paying taxes because of how the company manages its cash, other inverted companies might be able to do so. This could lead other companies to consider an inversion as a way to gain access to more overseas cash.

"It broadens the universe of companies that would be interested in pursuing an inversion," said Robert Willens, an independent corporate tax adviser.

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