The Covidien – Medtronic deal and the issue of ‘tax inversion’

| Jun 19, 2014 | Business Formation & Planning

The threads we’ve developed in this blog include various issues involving corporate taxes.

For example, late last month we discussed tax aspects of the Affordable Care Act as they apply to businesses.

In this post, we will take note of a tax issue involving the recent acquisition of a Massachusetts medical-device company by another such company in Minnesota.

The Massachusetts company is Covidien PLC. A few days ago, another medical-device company, Minnesota-based Medtronic, announced that it was acquiring Covidien for a whopping $42.9 billion.

The tax issue that has been raised concerns what may appear to be an attempt to avoid U.S. corporate taxes by moving many of the combined company’s operations out of the country.

The country in question, more specifically, is Ireland. Covidien has its headquarters in Massachusetts and most of its executives are there. But the bulk of the company’s operations are in Ireland.

The primary corporate tax rate there is roughly one-third of its U.S. counterpart. It is 12.5 percent in Ireland compared to 35 percent in the U.S.

Does this mean that achieving savings on corporate taxes was the main motivating force for Medtronic behind the Covidien deal?

The Wall Street Journal speculates that the deal may have been part of a trend motivated by a phenomenon known as “tax inversion.” This involves U.S. companies finding creative ways to use cash that was earned abroad and would be taxed more heavily if it were repatriated to the U.S.

For our purposes in this blog, we will merely note that complex corporate decisions like this require careful consideration. And they of course benefit from clear-sighted legal advice.

Source: The Wall Street Journal, “Medical Merger Part of ‘Tax Inversion” Wave,” Dana Cimilluca, Dana Mattioli and Joseph Walker, June 15, 2014