WASHINGTON — Medtronic’s plan to move its headquarters to Ireland after buying a Dublin device company is reigniting a debate in Congress and elsewhere over tax rules that some think are pushing U.S. companies overseas.
The $42.9 billion deal for Covidien would give Medtronic 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 Rep. Erik Paulsen, a Republican whose district 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. Pharmaceutical giant Pfizer aborted plans last month to acquire the British company AstraZeneca amid heated criticism of the tax benefits the deal would bring.
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University of Southern California law professor Edward Kleinbard, an expert on corporate sheltering of foreign profits, called the deal Medtronic announced Sunday “a textbook example” of using accounting rules to gain unfettered access to cash the United States would otherwise tax.
Kleinbard said the deal may not raise as much political ire as Pfizer’s failed attempt, 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. 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 leading corporate-tax consultant.
The U.S. federal corporate tax rate — 35 percent — is the developed world’s highest. And while companies typically pay much less than that, maneuvers like Medtronic’s are costing the government billions.
Democratic Rep. Betty McCollum, of St. Paul, 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.
Just what changes should take place depends on whom you ask.
In a conference call with investment analysts Monday, Medtronic CEO Omar Ishrak said a strategic marriage of product lines drove the deal — not unrestricted access to Medtronic’s foreign cash. But the larger company will have more investment options, Ishrak said, 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 American 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 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.
Corporate filings show Medtronic’s effective tax rate was 16.6 percent in 2011, 17.6 percent in 2012 and 18.4 percent in 2013. In Monday’s analysts conference call, Gary Ellis, Medtronic Chief Financial Officer predicted 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 request to estimate what it would owe in U.S. taxes if it brought its $20.5 billion in foreign profits back to this country.
Willens said the merger with Covidien probably will not lower Medtronic’s effective tax rate 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 tax reform.
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.”
Minnesota Gov. Mark Dayton relied on assurances from Ishrak that Medtronic’s Minnesota employment will grow with the merger to pronounce it good news for the state.
But that fact makes U.S. tax avoidance even more transparent in the eyes of some. The growth of foreign 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.
The idea that the new Medtronic will be an Irish company, Toder added, is nothing more than “an accounting fiction.”