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Continued: Medtronic's deal, plan to move base to Ireland rekindle tax debate

  • Article by: JIM SPENCER , Star Tribune
  • Last update: June 17, 2014 - 5:34 AM

Critics of such a change point out that many U.S. companies now use accounting gimmicks to book profits not to the countries where they perform work, but to low-tax havens where they pay little or nothing.

Democratic Sens. Amy Klobuchar and Al Franken of Minnesota are both cosponsors of a pending Senate bill called the Stop Corporate Inversions Act of 2014, which aims to take away U.S. tax breaks in deals like the one Medtronic set up with Covidien.

While Medtronic is moving its headquarters to Ireland, the company said it will continue to maintain its operational base in Minnesota. Franken and Klobuchar spoke with Ishrak Sunday, and they said the CEO assured them that Medtronic will add jobs in Minnesota as a result of a merger. But both issued warnings:

“Deals that result in companies reincorporating abroad often mean that they can shelter profits overseas, costing taxpayers billions of dollars — which I find troubling,” Franken said. “This needs careful scrutiny, and I plan to take a very close look at the specifics in the coming days.”

Klobuchar wants foreign profits of U.S. corporations brought back to America in a way that provides revenue for infrastructure projects. “The proposed merger highlights the serious need for comprehensive tax reform,” she said in a statement to the Star ­Tribune.

Corporate filings show that Medtronic’s effective tax rate was 16.6 percent in 2011, 17.6 percent in 2012 and 18.4 percent in 2013. In Monday’s analysts conference call, Gary Ellis, Medtronic’s chief financial officer, predicted that the merger would lower Medtronic’s tax rate by a percentage point or two.

Half the basic U.S. rate

That would make it roughly half the basic U.S. corporate rate. The company has not responded to a recent Star Tribune request to estimate what it would owe in U.S. taxes if it brought its $20.5 billion in foreign profits back to this country.

Willens believes the merger with Covidien probably will not lower Medtronic’s effective tax rate very much, if at all. But he thinks the company will avoid a residual tax and “substantial conditions” that likely will be placed on foreign earnings brought back to the U.S. in the event of any kind of U.S. tax reform.

Former Medtronic CEO Bill George defended the company’s actions in an interview with the New York Times. Foreign profits, George told the Times, “can’t be put to good use right now.”

Minnesota Gov. Mark Dayton relied on assurances from Ishrak that Medtronic’s Minnesota employment will grow with the merger to pronounce it good news for the state.

But that fact makes U.S. tax avoidance even more transparent in the eyes of some. The growth of foreign corporate tax shelters has led the multicountry Organization for Economic Cooperation and Development to undertake a study of what its calls “profit shifting.”

At the Urban-Brookings Tax Center, a Washington think tank, co-director Eric Toder said the developed world’s countries need to “agree on common rules on where profits are going to be taxed” to keep countries from poaching revenue from each other.

The idea that the new Medtronic will be an Irish company, Toder added, is nothing more than “an accounting fiction.”

 

Jim Spencer • 202-383-6123

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