It only looks like Medtronic's pending acquisition of Covidien has left this world and entered the twilight zone.

In fact, Medtronic's borrowing a lot of money it doesn't really need is just another example of the odd incentives created by the U.S. corporate tax code.

The news Friday was that Medtronic renewed its commitment to acquire Covidien in a roughly $43 billion cash-and-stock purchase, and emerge as a company based in Ireland. The deal didn't change, only the small matter of how Medtronic is paying for it.

It's now planning to pay the cash portion by borrowing $16 billion.

That may seem unremarkable, as Medtronic generated nearly $5 billion in cash flow from operations last year and can easily make the payments on a lot of debt. Yet it is bizarre to see a company borrow that much money to close a deal when it already has $13.5 billion of cash in the bank.

The new debt will cost, the company said Friday, about 4 to 4.5 percent. Meanwhile, its cash will earn from 2.25 to 2.75 percent.

This deal looks a little like a consumer with $250,000 in a passbook savings account that pays 1 percent interest leaving it alone and buying a house by applying for a $275,000 mortgage at 3.75 percent interest.

The good news for the consumer, of course, is that it will be pretty easy to qualify for the mortgage.

But the Medtronic financing only looks odd. Even the savviest consumer might be hesitant to spend $250,000 in cash on a new house if he would lose a big chunk of it to the tax man before he could pay the seller.

Why would a company with more than enough money go ahead and borrow nearly $13 billion? The answer, of course, is corporate taxes.

In the recent past, Medtronic has been committed to returning half of its free cash flow to investors each year through dividends and repurchases of stock. Just in the most recent quarter it bought back 17.1 million shares at a total cost of about $1.07 billion.

Medtronic has a problem fulfilling its commitment to use half of its free cash flow to buy back stock, however, in that it now doesn't have access to all of it. At least, it doesn't have access to the foreign-earned cash flow without it being subjected to the U.S. corporate tax rate of up 35 percent.

So Medtronic's solution has been to leave its foreign profits abroad. It's much cheaper just to borrow the money here to pay dividends and buy back stock.

These same disincentives to bring home cash in the U.S. tax code are why it's doing its inversion transaction with Covidien, so it's worth going over them again.

The U.S. corporate statutory tax rate of 35 percent is higher than in the big European economies like the United Kingdom and Sweden, and it's much higher than the 12.5 percent statutory rate in Ireland. Yet the high relative U.S. corporate tax rate high is not the whole story.

Generally under U.S. law, profits earned by a U.S. company's foreign subsidiaries are taxed abroad and then taxed again when brought home, up to the combined rate at the federal rate of 35 percent.

Unlike the U.S., other countries generally only tax the money that's made there.

An inversion is one solution to this problem of profits piling up abroad, but Medtronic's was one of a handful that put inversions in the headlines and spurred action in Washington.

Medtronic had planned to use $13.5 billion of undistributed profits held abroad to finance most of the cash portion of the Covidien deal, borrowing the rest from banks and other financing sources.

But it wasn't as simple as just cutting a check for $13.5 billion. Medtronic was planning to use the money for a series of intercompany loans, and the Treasury changed the tax rules on such loans last month, effective immediately.

It took Medtronic all of about 10 days to be ready to announce it would just borrow all the money instead.

What's interesting, of course, is that the company will now have $13.5 billion sitting in the bank accounts of non-U.S. subsidiaries after the closing of the Covidien deal. It will be interesting to see how that capital is ultimately deployed.

Medtronic's critics will probably look at borrowing billions of dollars it doesn't really need as just another example of the extraordinary effort corporate executives seem to put into getting out of paying U.S. taxes, sticking the small-business community and middle-class workers with a bigger share of the tax burden.

Let's hope these critics at least acknowledge, to themselves if not publicly, that this kind of odd financing wouldn't be happening if the corporate tax code would be reformed to look a little more like the rest of the world's.

lee.schafer@startribune.com • 612-673-4302