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

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

Some say rules are pushing U.S. companies overseas.

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Medtronic's Fridley headquarters.

Photo: Glen Stubbe, Star Tribune

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Medtronic Inc.’s plan to move its headquarters to Ireland after buying a device company there is reigniting a debate in Congress and elsewhere over tax rules that some think are pushing U.S. companies overseas.

The $42.9 billion acquisition of Dublin-based Covidien PLC would give Medtronic more flexibility to use money it earns abroad without incurring U.S. taxes. The global medical device maker, deeply rooted in Minnesota, would become the biggest U.S. company to move its place of incorporation to another country over U.S. taxation.

“We’re seeing one of our good homegrown Minnesota companies make decisions based on a broken tax code,” said Rep. Erik Paulsen, a Republican who represents Minnesota’s Third Congressional District, which includes Medtronic headquarters in Fridley. “It shows why reform is needed.”

Debate over multinational companies’ maneuvering to keep profits outside the United States to avoid taxes has intensified in recent months. Pharmaceutical giant Pfizer Inc. aborted plans last month to acquire the British company AstraZeneca PLC amid heated criticism of the tax benefits the deal would bring.

University of Southern California law professor Edward Kleinbard, an expert on corporate sheltering of foreign profits, called the deal Medtronic announced Sunday “a textbook example” of using accounting rules to gain unfettered access to cash the United States would otherwise tax.

Kleinbard said the Med­tronic deal may not raise as much political ire as Pfizer’s failed deal, but it continues a trend that is eroding America’s ability to collect taxes from its businesses.

If Congress doesn’t act soon, Kleinbard said, “policymakers are not going to have a corporate tax base.”

U.S. corporations pay taxes to foreign governments on profits earned abroad. But if they want to spend those profits in the United States, they also are supposed to pay the U.S. government the difference between what they paid foreign governments and what they would have paid in U.S. taxes had the income been earned here.

But by becoming a foreign-based company, Fridley-based Medtronic gains nearly “unlimited access” to roughly $14 billion in cash, and in the long term an additional $6.5 billion of foreign profits reinvested abroad, said Robert Willens, a leading corporate tax consultant.

The U.S. federal corporate tax rate — 35 percent — is the developed world’s highest. And while companies typically pay much less than that, maneuvers like Medtronic’s are costing the government billions of dollars in corporate tax revenue.

Democratic Rep. Betty McCollum of St. Paul blamed Medtronic’s actions partly on political gridlock.

“To the extent that this move is to seek a lower corporate tax rate, it should come as no surprise, since this Congress is unwilling to take on the difficult task of providing greater business certainty by moving comprehensive tax reform legislation,” she said in a statement to the Star ­Tribune.

Just what changes should take place depends on whom you ask.

A strategic marriage

In a conference call with investment analysts Monday, Medtronic CEO Omar Ishrak said a strategic marriage of device maker product lines drove the deal — not unrestricted access to Medtronic’s foreign cash. But the larger company will have more investment options, Ishrak said, promising an investment of $10 billion in the United States over the next decade.

Policymakers say the way the deal is structured points to problems with American tax rules.

Paulsen, a member of the House Ways and Means Committee, favors a territorial tax system that requires companies to pay taxes on foreign profits only where they are earned.

“It’s like we’re forcing American companies to pay a toll when they bring their money back home,” Paulsen said. “In nearly every other country, businesses can bring their profits back without a penalty.”

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