Schafer: Twin Cities firms are at center of debate over companies' tax flights to Europe

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: June 14, 2014 - 9:45 PM

Matthew Pearson and Roydell Greenhil hand assembled Pentair water pumps at the New Brighton assembly plant.

Photo: Bruce Bisping, Star Tribune

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It’s disheartening to see companies that grew up here reach middle age and decide to renounce their U.S. citizenship to save on their tax bills.

The corporate address for Pentair, founded here in the 1960s, is listed on its website as Freier Platz 10, which is not a street in Golden Valley you haven’t heard of. It’s in Switzerland, although the shareholders have just approved a move to Ireland.

According to Pentair, having its legal home in Europe doesn’t make the company an example of a “corporate inversion,” which has come to mean a U.S. company relocating its formal headquarters abroad to get a much lower tax rate.

In an e-mail exchange, a spokeswoman for Pentair at its Golden Valley operating headquarters pointed out that the merger with the Tyco Flow Control business that created Pentair Ltd., a Swiss company, was a “Reverse Morris Trust” deal. No way was it a tax inversion.

And that’s certainly accurate, although it took several mouse clicks to find an easily digested description of “Reverse Morris Trust.”

Turns out it’s a multi-step spinoff into a merger deal that has a target company’s shareholders (in this case, the old Pentair’s) end up owning less than half of the new company — thus saving on taxes.

Welcome to the arcane world of international tax law, where an hour spent studying tax avoidance structures like the “double Irish Dutch sandwich” leads primarily to the conclusion that a lot of really smart people seem to be working really hard to help corporations pay less in income taxes.

This also is not a topic that people in the Twin Cities corporate community seem eager to discuss on the record. A tax inversion deal just sounds like tax avoidance, not good management.

Prime candidates for doing them are companies with good-sized operations outside the U.S. already, which thus have some cash that’s been earned offshore and not yet taxed by the United States.

Is Medtronic going?

These are companies like Fridley-based Medtronic, one of the handful of genuinely iconic Minnesota companies.

So could a medical-device pioneer that started in 1949 in a northeast Minneapolis garage really be headed to London? Or Ireland?

Its thinking had leaked to the financial press, so Medtronic just began its big analyst day presentation in New York by telling its investors that it would not be taking any questions about its reported interest in buying the British-based Smith & Nephew PLC.

Last week Medtronic declined to talk about the prospect of a deal, saying it does not discuss rumors. While there is a strategic rationale for Medtronic to buy Smith & Nephew, primarily known for orthopedic products, the merger thesis also holds this: a 21 percent tax rate in the U.K. vs. 35 percent here.

 Medtronic, by the way, doesn’t now come close to paying the top U.S. rate, primarily because it is not bringing home the profits earned abroad. As of the end of its April 2013 fiscal year, the last disclosure available, the company hadn’t recognized U.S. tax expense for $20.5 billion of undistributed earnings from its non-U.S. subsidiaries.

 “Strategically, we do have this current problem that we have a lot of cash outside the U.S.,” CEO Omar Ishrak said in a May interview, confirming that Medtronic would consider a tax-inversion transaction.

 Then came the report Saturday via the Wall Street Journal that Medtronic was in advanced talks to acquire the Irish company Covidien, a deal that could accomplish the same goal in terms of tax savings and relocate Medtronic headquarters officially to Ireland.

Buying a company like Smith & Nephew is now how it’s done. Before the rules tightened, it was even easier for U.S. companies to get to a lower-tax jurisdiction, as when Ingersoll Rand went to Bermuda about a dozen years ago before eventually settling in Ireland, a long way from its North Carolina “corporate center.”

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