Medtronic could avoid $3.5B to $4.2B in taxes with merger

WASHINGTON – Medtronic Inc. could avoid $3.5 billion to $4.2 billion in U.S. taxes on funds it holds overseas as part of its plan to acquire a major foreign medical company and move its corporate headquarters to Ireland.

Medtronic told the Star Tribune that it estimates the tax rate on $14 billion it holds in foreign profits at 25 to 30 percent if the Fridley-based company were to bring that cash back to the United States.

But by becoming a foreign-based company, as proposed under a major acquisition Medtronic announced last week, the company could move the cash in ways that the tax would no longer apply, tax experts say.

The Medtronic plan to acquire Dublin-based Covidien for $42.9 billion has reignited a debate among corporations, consumers and politicians about how to improve the corporate tax system and remove incentives to shift business overseas.

Medtronic has said that tax advantages are not the reason for its plan to acquire Covidien, a deal that would also strengthen its competitive position. But the tax implications are nonetheless significant; the potential multibillion-dollar tax reduction on the $14 billion alone is several times the $521 million that Medtronic paid in taxes in its latest fiscal year.

The new Irish holding company, Medtronic PLC, would not be bound by U.S. tax laws. With the new corporate structure, Medtronic's foreign subsidiaries could loan money to the holding company without incurring U.S. taxes, says Edward Kleinbard, professor at the University of Southern California's Gould School of Law.

The $14 billion in existing foreign profits would not be differentiated from other funds that Medtronic PLC receives.

New York-based tax consultant Robert Willens, as well as Kleinbard, predicted that Medtronic will eliminate U.S. tax liability on any future foreign profits by booking them to newly created foreign subsidiaries that are parts of the Irish holding company, not the operational headquarters that will remain in the United States.

Medtronic's vice president of communications, Rob Clark, noted the 25 to 30 percent tax rate in an e-mailed response to a question from the Star Tribune. Asked to reply to the scenario for the $14 billion outlined by Willens and Kleinbard, Clark said there would be limitations on the company's ability to access the money.

"Without having more detail," Clark said, "I can only say that accessing that cash is possible, but [I] won't be able to comment further without much more detailed information. "

Sen. Amy Klobuchar, D-Minn., said the potential loss of $3.5 billion to $4.2 billion in federal revenue in the Medtronic deal signals the need for Congress to take action on the growing practice of U.S. multinationals booking earnings as foreign profits that are deferred from U.S. taxes.

"I would not prefer this deal," Klobuchar said in an interview. "I would have much preferred incentives, whether it was [a lower tax rate] for repatriation or long-term tax reform."

Critics counter that the money won't go directly to the federal budget to pay for schools or roads or to reduce the federal deficit. They say that corporate tax avoidance is a matter of fairness.

"I'm troubled by the trend of big companies exploiting loopholes to pay little or no taxes in the United States — often saving themselves billions of dollars — while small businesses and individual taxpayers are left to pick up the tab," Democratic Sen. Al Franken of Minnesota said in a statement to the Star Tribune.

Willens said Medtronic's estimate of the tax rate that would apply to the foreign money shows how little in taxes the company has paid foreign countries where it booked its cash.

U.S. companies pay taxes abroad on their foreign profits. If they bring those profits back to U.S.-based parent companies to spend in this country — a process called repatriation — they are supposed to pay the difference between the tax rate they paid abroad and the U.S. corporate base rate of 35 percent.

The 25 to 30 percent repatriation rate shows "that very little tax was paid on foreign earnings," Willens explained.

Clark confirmed to the Star Tribune that Medtronic paid a foreign tax rate on its cash of between 5 and 10 percent.

"This is the first time anyone would have heard this," said Willens, a former managing director of equity research at Lehman Brothers. "This will be of interest to the market."

In past filings with the government, Willens said Medtronic has said it was "not practicable" to estimate the cost of bringing foreign profits back to the United States.

Booking profits abroad and deferring them indefinitely from U.S. taxes has become an increasingly common practice for U.S. companies. America's base corporate tax rate is the developed world's highest, but the tax rate that companies actually pay is generally much lower because of loopholes.

In 2013, Medtronic paid taxes at an overall rate of 18.4 percent, roughly half of the U.S. statutory rate. The tax rate in Ireland, where the company wants to be headquartered, is 12.5 percent.