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Medtronic: Strategy, Not Tax, Behind Covidien Deal

by Mike Godfrey,, Washington

22 August 2014

Medtronic Inc's Chief Executive Omar Ishrak has insisted that the company's USD42.9bn deal to acquire Dublin-based Covidien Plc, and, thereby, move its tax residence from the United States to Ireland in a "corporate inversion," is based on business logic and not corporate tax reduction.

Medtronic is among a number of US multinational corporations who have used, or intend to use a corporate inversion as a means of moving their tax domicile away from the high 35 percent corporate tax rate in the US to, in this case, the lower 12.5 percent rate in Ireland. Such companies have been described, by President Barack Obama and other lawmakers, as "unpatriotic" and "corporate deserters."

However, during the company's recent earnings conference call, Ishrak pointed out that, "when the transaction closes, Medtronic will continue to pay significant US taxes and increase our investments in the US. On taxes, we will continue to pay federal, state and local income taxes on all US earnings, as well as social security taxes, property taxes and the medical device tax. Cumulatively, these taxes represent more than 45 percent of US income and we expect to pay a similar rate post close."

He confirmed that "the company's effective tax rate on global income will fall to about 16-17 percent after the deal from 18-19 percent now," and added that "this transaction will put us on an even playing field with foreign companies regarding use of [the Group's] internationally-generated profits. This structure will allow us to invest much more aggressively in the US and based on that we have committed to investing an incremental USD10bn over the next 10 years. These investments will result in more high paying US jobs. We have a proven track record of creating US jobs with our past acquisitions."

He reiterated that the strategic benefits of the transaction for Medtronic are very clear, in that it will expand its portfolio of innovative products and services, and drive more value and efficiency in its healthcare products, while, with a presence in more than 150 countries, the combined entity will be better able to serve global market needs.

When asked whether the company would still be committed to the takeover if it had to adopt a different transaction structure due to possible future anti-inversion legislative or regulatory changes taken in the US, he repeated that "we can only plan a deal structure based on facts and what the current regulations and law are. … But in all cases, the strategic benefits do not go away and are clearly not affected by any legislative or regulatory changes. That's the way we're looking at it."

Although it said at the time that it had derived no tax benefit from the change, Covidien also has a history in respect of changing its tax residence, in its case a move from Bermuda to Ireland that was completed in 2010.

TAGS: compliance | tax | investment | business | tax compliance | Ireland | property tax | corporation tax | excise duty | health care | transfer pricing | social security | United States | tax breaks | regulation | services | business investment

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