A proposed settlement with the IRS this week will resolve a tax dispute that Medtronic inherited when it bought Covidien a year ago, but the Ireland-based medical device company still has several ongoing tax disputes and audits with the tax man.
On Tuesday, Medtronic announced it would pay as much as $220 million toward the $525 million tax settlement that Covidien's former owner, Tyco International, recently struck with the IRS. The settlement, which needs IRS approval, is intended to resolve all of Covidien's U.S. tax disputes through 2007, when Tyco spun off the surgical supply company, securities filings say.
In 2013, the IRS said Tyco owed more than $1 billion in back taxes and fees for tax years 1997 through 2000. The company disagreed.
The dispute involved whether Tyco could legally claim deductions on its federal income taxes for interest on billions in "intercompany" loans. If the IRS had won at trial, it would have likely applied the same legal reasoning to another $6.6 billion in Tyco interest deductions through 2007, securities filings say.
Instead, this week's settlement would require Tyco to pay up to $142 million, less than it had already set aside to cover the settlement. William Blair & Co. analyst Nicholas Heymann sent a note to investors calling the deal "encouraging" and "potentially favorable" to the companies. The IRS declined to comment.
Under complex legal agreements struck in 2007 and 2012, Tyco is responsible for paying 27 percent of the settlement it struck with the IRS, while Covidien (now Medtronic) will pay another 42 percent. The remainder will be covered by TE Connectivity, another company spun out of Tyco International in 2007.
Covidien has already "reached agreement" on disputed amounts of U.S. income taxes for 2008 and 2009, but tax collectors are still auditing the company's 2010, 2011 and 2012 taxes, Medtronic filings say.
Medtronic, which was founded in Minneapolis in 1949, moved its legal address to Covidien's headquarters on Lower Hatch Street in Dublin, Ireland, last January after Medtronic acquired it for $49.9 billion in cash and stock.
Ireland's corporate tax rate is about one-third of the U.S. rate of 35 percent. The combined company kept most of its executives' offices in Fridley and pledged to create more U.S. jobs and investments with its enhanced financial flexibility after the deal.
This month Medtronic announced plans to spend $9.3 billion in cash and equivalents that was freed up through an internal reorganization of Medtronic's former U.S.-controlled subsidiaries outside the country.
The tax disputes between Covidien and the IRS are not Medtronic's only dispute with U.S. tax collectors.
Securities filings describe three separate ongoing tax disputes between Medtronic and the IRS, covering fiscal years 2005-11, plus ongoing audits of Medtronic's fiscal 2012, 2013 and 2014 income taxes.
Each of the disputes between 2005 and 2011 involve disagreements over "allocation of income" between then-U.S.-based Medtronic and its Puerto Rico manufacturing center, Medtronic Puerto Rico Operations Co., which is incorporated in the Cayman Islands, according to securities filings.
It's not clear how much the IRS claims that Medtronic owes in unpaid taxes. Records from federal tax court are either redacted or not public.
The legal news service Law 360 has reported that Medtronic is fighting an IRS demand for $561 million relating to a tax dispute covering fiscal years 2005 and 2006. A trial on that was held last year, and a ruling is not expected before April.