Medtronic's Covidien deal spurs debate about corporate taxes
Is Medtronic's massive international corporate merger a billion-dollar tax dodge, an indictment of the U.S. tax code, or a business-savvy work-around that would spur investment and growth in the Twin Cities?
The answer depends on who you talk to.
The $42.9 billion cash-and-stock purchase of Covidien, announced Sunday, comes with plans for Medtronic to decamp its executive suite to Ireland, where Covidien is based.
It also will nearly double the size of the Fridley-based medical device maker, and likely result in no significant change in its 8,000-strong Twin Cities workforce. The company is talking about adding 1,000 workers locally.
The move is designed to allow Medtronic to avoid U.S. corporate tax rates in repatriating foreign earnings and cash held overseas, potentially letting the company invest billions in the United States.
But critics questioned whether Medtronic would unfairly shift its tax burden to others. Some questioned whether the move will diminish Medtronic's role in Minnesota, where it's been central to a 50-year local narrative of innovation and business development.
Minnesota politicians of both stripes were critical.
"This clearly highlights the need to fix our broken tax code so American companies can be more competitive," said Republican U.S. Rep. Erik Paulsen. A statement from the Minnesota GOP blamed a medical-device tax associated with Obamacare.
And U.S. Sen. Al Franken, a Democrat, said: "Deals that result in companies reincorporating abroad often mean that they can shelter profits overseas, costing taxpayers billions of dollars -- which I find troubling."
Under the merger agreement announced Sunday, Medtronic Chief Executive Officer Omar Ishrak would lead the merged company, with operational headquarters remaining in Fridley. Principal executive offices would move to Ireland, where Medtronic already has operations.
Different countries impose different tax rates on corporations, and the disparity has prompted firms in high-tax nations to consider these so-called "inversion" deals for many years.
The United States has one of the world's highest corporate tax rates at 35 percent, while Ireland's is relatively low at 12.5 percent, said Ken Levinson, a partner with Faegre Baker Daniels LLP in Minneapolis who leads the firm's international tax practice.
Pulling off an inversion isn't easy.
It Medtronic's shareholders, for example, wind up owning 80 percent or more of the new holding company, the U.S. government wouldn't recognize the new entity as a foreign company, Levinson said, no matter where its executives are based.
The government would decide Medtronic had simply "substituted a different mailbox," he said, and would subject the holding company to regulatory requirements and treatment as a U.S. corporation for tax purposes.
If Medtronic shareholders obtain at least 60 percent of the new holding company, it must pay tax on what's called an "inversion gain" to Internal Revenue Service, Levinson said, and will be subject to certainly regulatory compliance requirements for about 10 years. But up-front costs in that scenario could make sense for the company considering in long-run tax savings, he said.
"In the Covidien transaction, the prior Covidien shareholders would own 30 percent of the resulting equity," Levinson said. "(The companies) have taken pains to fall below the 80 percent threshold -- and they are apparently going to be above the 60 percent threshold."
If Medtronic avoids taxes through an inversion, is that unfair to other U.S. taxpayers?
"Fair or unfair is in the eyes of the policymakers, which changes from time to time," Levinson said. "There have been a number of these transactions over the years. You can see where this makes economic sense."
Last year, Medtronic had about $20.5 billion in undistributed earnings from non-U.S. subsidiaries. It's unclear whether U.S. taxes are owed on the sums, but if so, the merger might provide a chance to get out from under the burden, said Matt Gardner of the Institute on Taxation and Economic Policy, in Washington, D.C.
The Covidien deal could lighten the company's tax burden going forward, Gardner said, adding: "In the long run, we'll all have to pay higher taxes to pay for what Medtronic is doing."
But Medtronic spokesman Rob Clark said such comments mischaracterize the deal. There's no change to the U.S. taxes Medtronic is currently paying, he said, and much of the profit sitting overseas still will be subject to U.S. taxes.
During a conference call with stock analysts Monday, Chief Financial Officer Gary Ellis said the merger "provides us the opportunity to significantly increase our flexibility on the cash side, especially for what capital we can invest back in the United States."
Medtronic's proposal is not unlike the current structure for Covidien, said Brooks West, a stock analyst with Piper Jaffray in Minneapolis. Covidien is based in Ireland, but decision-makers work from a headquarters in Massachusetts.
Medtronic has made assurances that Minnesota will play a key role in the company's future operations, and could see 1,000 new jobs over the next five years.
"I really would be shocked to see much of an employment risk just from Medtronic being domiciled in Ireland," West said. "Minneapolis has got a great base of med-tech talent ... I would be really surprised to see a shift."