Before Medtronic's deal, Pentair relocated twice to save on taxes

  • Article by: DEE DEPASS , Star Tribune
  • Updated: July 1, 2014 - 1:56 PM

Pentair and Stratasys also moved their headquarters to lower-tax countries.

Mark Henneman, vice president of the St. Paul investment firm Mairs and Power, which owns stock in Medtronic, as well as Pentair and Stratasys.

 

Medtronic Inc. captured global attention this month with its proposed $42.9 billion deal to acquire Irish medical firm Covidien Inc., while also cutting its federal taxes by making Ireland its financial headquarters. But the Fridley-based medical device maker is not the first Minnesota corporation to make the leap overseas.

Ten months ago, Eden Prairie-based 3-D printing firm Stratasys merged with Israel-based Objet Ltd. and changed its official headquarters to Israel, which has a lower tax rate. The move saved Stratasys $3 million a year.

And in 2012, the water technology company Pentair merged with Tyco Flow Control and “re-domiciled’’ its corporation from Golden Valley to Switzerland. That merger — accomplished through a tax-free “Reverse Morris Trust” — lowered Pentair’s corporate tax rate from 29 to 24.6 percent.

Determined to save even more, Pentair relocated again on June 3 from its Swiss headquarters to Ireland, which has a tax rate of roughly 12.5 percent.

Until Medtronic’s blockbuster Covidien deal was announced on June 15, these type of corporate relocations did not attract significant attention, in part because the operational headquarters and most employees typically remained where they had been. That’s all changed, as lawmakers and the Obama administration focus on the billions of dollars Medtronic’s move will cost the U.S. Treasury.

“The issue is now under the microscope,” said Mark Henneman, vice president of the St. Paul investment firm Mairs and Power, which owns stock in Medtronic, as well as Pentair and Stratasys. In changing domiciles, Medtronic, Stratasys and Pentair have joined a growing list of U.S. firms looking to reduce their tax debt to Uncle Sam.

Bloomberg News estimates that 44 companies have pursued similar corporate “inversions” or “reverse trust” strategies. Meanwhile, employees, investors and lawmakers are scrambling to grasp the practical effects of complicated tax strategies on jobs, capital gains and U.S. tax policies.

“Wall Street absolutely loves this deal” because of the possible corporate tax cuts and profit boost, said Henneman about the Medtronic-Covidien merger. But shareholders face their own tax issues.

Depending on which legal tools are used to structure an international merger, some mutual fund and individual stockholders could face taxes, Henneman said.

That’s the case with Medtronic, which plans to use something called a “corporate inversion” to legally relocate its headquarters to Ireland. “I have a few clients who are very upset about it. With this being a taxable event, we have a number of shareholders who are now looking at a significant capital gains tax.”

In contrast, Pentair’s deal resulted in tax-free transactions for shareholders, Henneman said.

“Frankly, the Pentair/Tyco deal was a lot easier to understand. It was merging businesses that were certainly quite related to each other,” Henneman said. “With Medtronic and Covidien, the clarity is not quite there.”

Pentair spokeswoman Marybeth Thorsgaard said that a review was conducted in 2013 “to determine the most appropriate and bene­ficial jurisdiction and tax residency for Pentair going forward.”

That jurisdiction proved to be Ireland, she said. The country has corporate tax rates as low as 12.5 percent. The U.S. hit on corporations’ overseas earnings coming back into the states brings the total tax bill to a stinging 35 percent.

In Washington, these tax-motivated deals have lawmakers demanding answers.

“My worry is that more companies will do this” and take jobs out of the United States, Sen. Amy Klobuchar, D-Minn., said in an interview with the Star Tribune last week. “That is why I have been arguing that we need to do something this year, or early next year, to ­create positive [tax] incentives for [overseas] money.”

Lots of ideas in Congress

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