WASHINGTON -- Medtronic Inc.'s plan to move its headquarters to Ireland after buying a medical device company there is reigniting a debate in Congress and elsewhere over federal tax rules that some say are pushing U.S. companies overseas.
Medtronic's $42.9 billion acquisition of Dublin-based Covidien PLC would give the company 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 U.S. Rep. Erik Paulsen, a Republican who represents Minnesota's 3rd Congressional District, which includes Medtronic headquarters in Fridley, Minn. "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. Last month, pharmaceutical giant Pfizer Inc. aborted a plan to acquire the British company AstraZeneca PLC amid heated criticism of the tax benefits that would result from the deal.
University of Southern California law professor Edward Kleinbard, an expert on corporate sheltering of foreign profits, called the deal Medtronic announced last 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, 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 corporate tax consultant.
The U.S. federal corporate tax rate -- 35 percent -- is the developed world's highest. While companies effectively pay at levels much less than the 35 percent rate, moves like Medtronic's cost the government billions of dollars in lost corporate tax revenue.
U.S. Rep. Betty McCollum, D-Minn., 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 (Minneapolis) Star Tribune.
In a conference call with investment analysts Monday, Medtronic Chief Executive Officer Omar Ishrak said a strategic marriage of device-maker product lines drove the deal -- not unrestricted access to foreign cash.
But Ishrak said the larger company will have more investment options, promising an investment of $10 billion in the United States in the next decade.
Policymakers say the way the deal is structured points to problems with U.S. 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."
Critics of such a change point out that many U.S. companies now use accounting gimmicks to book profits not to the countries where they perform work, but to low-tax havens where they pay little or nothing.
Democratic U.S. Sens. Amy Klobuchar and Al Franken of Minnesota are both co-sponsors of a pending Senate bill called the Stop Corporate Inversions Act of 2014, which aims to take away U.S. tax breaks in deals like the one Medtronic set up with Covidien.
While Medtronic is moving its headquarters to Ireland, the company said it will continue to maintain its operational base in Minnesota. Franken and Klobuchar spoke with Ishrak on June 14, and they said Ishrak assured them that Medtronic will add jobs in Minnesota as a result of a merger. But both senators issued warnings:
"Deals that result in companies reincorporating abroad often mean that they can shelter profits overseas, costing taxpayers billions of dollars -- which I find troubling," Franken said. "This needs careful scrutiny, and I plan to take a very close look at the specifics in the coming days."
Klobuchar wants foreign profits of U.S. corporations returned to America in a way that provides revenue for infrastructure projects. "The proposed merger highlights the serious need for comprehensive tax reform," she said in a statement to the Star Tribune.
Corporate filings show that Medtronic's effective tax rate was 16.6 percent in 2011; 17.6 percent in 2012; and 18.4 percent in 2013.
During Monday's conference call with analysts, Gary Ellis, Medtronic's chief financial officer, predicted that the merger would lower Medtronic's tax rate by a percentage point or two.
That would make it roughly half the basic U.S. corporate rate. The company has not responded to a recent Star Tribune request to estimate what it would owe in U.S. taxes if it sent its $20.5 billion in foreign profits back to this country.
Willens believes the merger with Covidien probably will not lower Medtronic's effective tax rate very much, if at all. But he thinks the company will avoid a residual tax and "substantial conditions" that likely will be placed on foreign earnings brought back to the U.S. in the event of any kind of U.S. tax overhaul.
Former Medtronic CEO Bill George defended the company's actions in an interview with The New York Times. Foreign profits, George told the Times, "can't be put to good use right now."
But that fact makes U.S. tax avoidance even more transparent in the eyes of some. The growth of foreign corporate tax shelters has led the multicountry Organization for Economic Cooperation and Development to undertake a study of what it calls "profit shifting."
At the Urban-Brookings Tax Center, a Washington think tank, co-director Eric Toder said the developed world's countries need to "agree on common rules on where profits are going to be taxed" to keep countries from poaching revenue from each other.
SundayMonday Business on 06/22/2014