Medical device giant escapes the IRS

Medtronic is spending $43 billion to buy an Irish rival. In doing so, it moves its tax domicile out of the US.

By MSN Money Partner Jun 16, 2014 11:47AM
Image: Calculating numbers for income tax return with pen and calculator © Stockbrokerxtra Images, PhotolibraryBy Matthew Herper, Forbes

Medical device giant Medtronic (MDT) looks as if it will succeed where the drug behemoth Pfizer (PFE) failed: It is acquiring a rival in large part to move its tax domicile out of the United States, lowering its tax rate.


Medtronic announced Sunday that it has agreed to purchase Dublin, Ireland's Covidien (COV) for $42.9 billion in cash and stock. 


Medtronic, now based in Minneapolis, is the second-biggest maker of medical devices after Johnson & Johnson (JNJ), and is a powerhouse that builds implantable heart devices and equipment used in spinal surgery procedures. It had net income of $3 billion on sales of $17 billion in its last fiscal year. 


Medtronic will move its corporate headquarters to Dublin, but says it "will continue to have its operational headquarters in Minneapolis, where Medtronic currently employs more than 8,000 people."


That strategy may be the biggest asset Medtronic is getting from Covidien, despite the latter's $10 billion in annual sales of surgical tools, catheters, and scopes. 


Until 2007, Covidien was part of Tyco International (TYC), the scandal-plagued roll-up (remember Dennis Kozlowski?) that had its tax domicile in Bermuda. Covidien initially kept the Bermuda tax shelter, but two years later moved its headquarters to Ireland. The whole time, much of its operations were based in Marshfield, Mass. 


Earlier this year, Pfizer, the largest drug giant, tried to purchase London's AstraZeneca (AZN) in part to move its tax domicile; the deal ran aground over issues of price and AstraZeneca's desire to remain independent.


In a press release, Medtronic chief executive Omar Ishrak argued that the deal has other benefits, too, giving the new company increased negotiating power with hospitals and governments and a bigger global footprint. But the U.S. corporate tax rate is 35 percent, among the world’s highest, while in Ireland it is just 12.5 percent.


The benefits of changing Medtronic's address -- known as a "tax inversion" -- are more complicated than they would first appear. Derrick Sung, an analyst at Sanford C. Bernstein, said in a note to clients that Medtronic's current 19 percent tax rate is only two points higher than Covidien’s 17 percent rate. (Medtronic's tax rate might go up as it resolves a dispute with the Internal Revenue Service, but would remain low, Sung says.)


But Medtronic currently has $14 billion in cash on its books, and half of that money is overseas. Spending it in the U.S. would mean paying U.S.-level taxes on it. But domiciling in Ireland will allow Medtronic to spend the money with a far lower tax rate. Sung told his clients that the deal could be 7 percent to 12 percent dilutive to Medtronic, but that tax benefits may well make up much of that difference.


There's an obvious reason for Medtronic to push for financial innovations: Sales growth from its technological ones has been slow. Last year Medtronic grew its revenues just 2.5 percent. And innovation has been hard. In 2010, Medtronic spent $800 million, plus milestones to be paid in the future, on a startup called Ardian that had a new device for controlling high blood pressure. "I couldn’t be more excited," its then CEO, William Hawkins, told me. In April, the device failed to show any benefit in a large clinical trial.


Pfizer's attempt to flee its U.S. tax base was a warning shot to American legislators; Medtronic's departure appears to be the real deal. Congress should take the warning, and move quickly both to lower U.S. tax rates (so that companies will feel less need to flee) and to create new barriers to companies executing tax inversions.


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178Comments
Jun 16, 2014 12:24PM
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"Congress should take the warning, and move quickly both to lower U.S. tax rates"

 

Not a problem. The Senate will quickly come up with something the House won't pass and the House will quickly come up with something the Senate won't pass. Oblamo will quickly blame everyone else.

Jun 16, 2014 12:59PM
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Keep Taxing the companies out of the U S A 

When they KILL ONE GOOSE THEY WILL HAVE TO FIND ANOTHER

Take a WILD GUESS WHO THAT WILL BE 
Jun 16, 2014 12:50PM
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I can't blame them for reducing their corporate income taxes down to 12.5%.  Don't forget that they were also subject to the Obamacare medical device tax - an additional excise tax of 2.3% of the sales price of all the medical devices they produce.
Jun 16, 2014 2:44PM
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Our government punishes those who succeed and rewards the ones that do nothing but want a handout.

What has happened to our GREAT COUNTRY?

We are being sold out by our politicians in Washington.

DON'T YOU JUST LIKE THE NEW POLL THAT SAYS CLINTON AND ODUMA ARE THE MOST ADMIRED PRESIDENTS.

WHO WAS POLLED, FOREIGN COUNTRIES?

Jun 16, 2014 1:27PM
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Another perverted spin of the truth Mr. Herpes. The truthful title line is 'Burdensome US tax policy drives another American business offshore'.
Jun 16, 2014 1:56PM
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Al Gore did the same thing and avoiding taxes by selling his tv station.

 

lets not forget that msn

Jun 16, 2014 12:54PM
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Keep raising TAX so more companies move.
Jun 16, 2014 2:02PM
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All you libs on here just remember Al Gore did the same thing to avoid paying millions in taxes by selling his tv station.

 

You guys love Al gore so I am sure you will find an excuse as to why he is exempt

Jun 16, 2014 3:29PM
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The entire tax burden for the United States should not be pushed on to corporations, the upper middle class, and the wealthy. Everyone should pay a fair share.

Jun 16, 2014 1:04PM
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Buying a foreign subsidiary and moving enterprise to that location could become a trend.  Apple could buy Samsung, Intel could buy TSM and Microsoft could buy Lenovo and they could save over $200 billion in taxes. There's nothing like free enterprise!

Jun 16, 2014 2:21PM
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Why don't we just all pretend like the so called multi-nationals pretend; that we're all domiciled in Ireland or Caiman Islands.  Even though our income is from this country.

Then we'll have no tax receipts for basic upkeep; no state income tax or federal. 

More bridges and roads will fall apart. Parks and other transit systems will be completely mess. Education will suck even worse.  And we can start looking like a 3rd world country.

And in the long run, our income will truly not come from the US because we won't have an income.

Sounds like fun!

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How is it these companies claim they have no money for taxes and yet will spend tens of millions to buy their favorite congressman. In 2004 congress gave companies an offshore tax break and the result was "The subcommittee's report found that the last repatriation tax holiday cost the Treasury at least $3.3 billion in net revenue lost over ten years and that it "produced no appreciable increase in U.S. jobs or domestic investment, and led to U.S. corporations directing more funds offshore."    The corps have proved that no matter how many tax breaks you give them they will refuse in invest in US jobs and will keep winning about how over paid US workers are
Jun 16, 2014 4:54PM
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The government looks for a way to screw every company they can and then complain about the high cost of medicine. It's about control people and the Democrats want it over every aspect of your life!

Food, healthcare, education, and housing. Pretty much sums it up.

Jun 16, 2014 5:12PM
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Hunt down their CEO and board of directors. Try them for treason.
Jun 16, 2014 4:13PM
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of course they will still want to peddle their devices here--most especially to government paid medicare patients
Jun 16, 2014 4:11PM
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obviously-in matters like this our congress has already been bought and sold as well
Jun 16, 2014 5:35PM
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Lets not forget Obamas loan of 527 million dollors to his buddies at Solyndra. Then his buddies file for bankruptcy leaving the tax payers holding the bill. More democrat lying and stealing.
Jun 16, 2014 5:09PM
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If people would be responsible to take care of themselves we wouldn't have such high taxes. The government raises taxes on companies to get money to give as free cheese for votes to control. This increases cost of products that is passed to the consumer. Government then blames the businesses for high cost. Morons! The government hires a person to collect your taxes, pays someone to disperse the taxes, and gives the taxes to someone who doesn't deserve the taxes. All while paying everyone in the tax chain. When if allowed to keep our money in the first place I could save and decide when and what I need but the government wouldn't have control over me....  
Jun 16, 2014 4:19PM
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Another fine example of the Demoncraps tax policies costing Americans jobs.
Jun 16, 2014 5:00PM
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And now the Agenda's from the Neo-Pubs come out wailing about the "tax and spend" MYTHS..

Sweet Geezus..


Most Corporations spend very little on overall taxes, when all is said and done..

And what taxes, that are paid are passed on to the end user or consumer...

That's how our Corporation did it....Many of you are very naïve...IMO.

Ahhhh, the Republican Way, or the old "bait and switch" routine....Keep them mulling and off guard.

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