News Column

Medtronic Says Merger Isn't About Tax Avoidance

July 16, 2014

Christopher Snowbeck, Pioneer Press

July 16--Medtronic officials are pushing back against widely published suggestions that the company's proposed acquisition of Dublin-based Covidien is motivated primarily by a desire to avoid U.S. taxes.

A company tax official said Wednesday that the Fridley-based medical device manufacturer will continue to face a host of U.S. taxes once the deal closes, including on about $14 billion in overseas cash, a key figure in the tax-avoidance debate. The company says the deal primarily is about medical technology.

Some tax experts have suggested the Covidien deal would let Medtronic avoid paying billions in taxes on overseas profits, but Medtronic maintains the cash will continue to be "trapped" -- meaning subject to U.S. taxes if it is to be used in the United States.

The comments Wednesday came a day after U.S. Treasury Secretary Jacob Lew urged Congressional action to prevent these so-called "inversion" deals that let U.S. companies move headquarters overseas.

"For Medtronic to take its (outside-the-United States) cash and invest it in the U.S., there is an incremental tax," said Phil Albert, the company's vice president of corporate tax. "That continues to apply, pre- and post-inversion."

Edward Kleinbard, a tax expert at the University of Southern California, countered: "It's literally true, but it's not what any well advised firm would do." There will be ways, Kleinbard said, for Medtronic to use its new corporate structure to avoid taxes.

At 35 percent, the United States offers the highest corporate income tax rate in the industrialized world, Donald Goldman, a professor at Arizona State University's W.P. Carey School of Business, said in a recent news report. By contrast, the European Union has an average tax rate of 21 percent.

In June, Medtronic announced plans to acquire Covidien in a $42.9 billion deal that would move the company's headquarters to Ireland for tax purposes. Medtronic has acknowledged the deal will create certain tax advantages going forward, but maintains the deal is motivated primarily by its strategy in the market for selling medical devices used by doctors and hospitals.

There's been speculation among tax experts and financial analysts that the inversion deal would let Medtronic invest its overseas cash in the U.S. without paying taxes here -- potentially avoiding billions in taxes. The discussion has focused on the tax treatment of about $13.9 billion in cash, cash equivalents, debt and securities that Medtronic says can be converted to cash.

"Multinationals are already quite adept at shifting their profits, on paper, from place to place," said Matt Gardner of the Institute on Taxation and Economic Policy in Washington, D.C. "It seems plausible that after the inversion, Medtronic will find this even easier to accomplish."

Paul Vaaler, a tax expert at the University of Minnesota, noted last month that the proposed deal would let Medtronic or Covidien back out of the acquisition if applicable tax laws or Internal Revenue Service rulings change prior to closing late this year or in early 2015.

Vaaler said in June: "At the beginning and end of this, the deal is about corporate taxation rates in the U.S., and how those rates deter Medtronic from repatriating billions of dollars now sitting in foreign subsidiary operations."

But Albert, the Medtronic official, disputed that particular motivation Wednesday, saying: "Medtronic's foreign earnings post the deal will continue to be subject to the U.S. tax if brought back to the U.S."

On Tuesday night, The Wall Street Journal reported that Secretary Lew had written a letter to lawmakers about inversion deals, arguing that Congress "should enact legislation immediately ... to shut down this abuse of our tax system." The administration supports making changes retroactive to May 2014, the newspaper reported.

Inversions can happen if a U.S. company combines with a foreign business and shareholders of the foreign entity own at least 20 percent of the newly merged business. Legally, the foreign company might acquire the U.S. business or the two would create a new entity overseas. But the U.S. company often maintains both its corporate headquarters and control of the company.

The administration has proposed raising the threshold for inversions on foreign entity ownership to 50 percent, with the goal of making them less attractive.

David Maris, an analyst with BMO Capital Markets, wrote in a note to investors Wednesday that "the environment for tax inversion deals may have just gone from red hot to quite chilly." Also on Wednesday, Rep. Sander Levin, D-Mich., issued a statement in support of Lew, saying: "Ordinary Americans can't change their address to an overseas location in order to avoid paying taxes."

Albert, the Medtronic official, acknowledged certain tax advantages related to Covidien's overseas cash that explain why Medtronic is moving its headquarters. If Medtronic were to remain in the United States after the deal, Covidien's overseas profits would be newly subject to U.S. taxes if invested in this country, Albert said.

In a "Guide to Tax Inversion" distributed by the company Wednesday, Medtronic stated: "This deal gives us access to additional cash from Covidien's overseas operations that will be used to reward shareholders, grow business and invest in innovation. As a result, we are committing to investing $10 (billion) in the U.S."

Even with the deal, Medtronic says it will continue paying federal income taxes on all money earned in the United States, plus state and local taxes. The company also will continue to pay a new excise tax on the sale of medical devices in the U.S., which helps fund expanded health insurance coverage through the federal Affordable Care Act.

But Kleinbard of the University of Southern California said that cash is fungible, so using the Covidien cash in the U.S. is effectively the same thing as using the Medtronic cash.

"Moreover, the Medtronic cash can be used to fund stock buybacks or lent to the new Irish parent company after the acquisition," he said. "The end result is the same -- they don't pay U.S. taxes."

Reports from Associated Press and Dow Jones Newswires were used in this story. Christopher Snowbeck can be reached at 651-228-5479. Follow him at


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Original headline: Medtronic pushes back against tax-avoidance questions in merger

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