Medtronic's move to profit from offshore tax breaks is harbinger for medtech industry

06/25/2014

Irish and shareholder eyes may be smiling at the prospect of medtech giant Medtronic acquiring Covidien and moving its headquarters to Ireland, where Covidien is based, but the $42.9 billion deal is causing at least a few frowns, as well. Minneapolis-based Medtronic is the largest U.S. company to try to change its tax domicile through what the financial community calls an inversion, reports the New York Times.

Like many U.S. companies operating on the global stage, Medtronic has significant piles of cash parked overseas that it is understandably reluctant to repatriate to the United States and subject to a 35% corporate tax rate, among the highest in the world. "Covidien's overseas cash and future earnings from its businesses will not be subject to the U.S. repatriation taxes, giving the enlarged Medtronic a new source of cash it can use freely," writes the Times' David Gelles.

It should be noted, however, that good stewardship by former Medtronic CEO Bill George has bequeathed the company with a more favorable tax rate of 18%, and the inversion would reduce the burden by only a couple of percentage points, according to analysts. Current CEO Omar Ishrak also downplayed the role that tax benefits played in this decision, noting that the company planned to invest $10 billion in the United States over the next 10 years. "The combined company should generate significant free cash flow, which can be deployed with much greater flexibility," he said during a conference call on June 16.
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