With talks heating up on Capital Hill about tax-dodging companies, medical device giant Medtronic (NYSE:MDT) issued an update regarding its tax position before and after the pending $43 billion merger with Covidien (NYSE:COV).
In an interactive graphic also filed with the SEC, Medtronic said that moving its headquarters overseas will only ensure that it can continue to use Covidien’s cash for U.S. investments.
Medtronic is using the Covidien merger as an occasion to shift its corporate headquarters to Covidien’s base in Dublin, Ireland. That means that the combined companies can access foreign stores of cash without paying U.S. taxes upon repatriation.
Called an "inversion," the move has been increasingly popular among large companies with significant foreign holdings. The exodus has gotten the attention of the White House, which asked Congress this week to take action to de-incentivize inversions.
Medtronic and Covidien have maintained that their merger isn’t motivated by the inversion, saying that the main drivers were strategic.
"The real purpose of this, in the end, is strategic, both in the intermediate term and the long term," Ishrak told Reuters. "It is good for the U.S. in that we will make more investment in U.S. technologies, which previously we could not."
Covidien moved its headquarters to Ireland in 2009, saying that the company hoped to benefit from the lower corporate tax rate there, and Medtronic plans to make the same move once the mega-merger closes later this year or early in 2015.
"Today, Covidien does not pay an incremental tax to invest its OUS cash in its U.S. business. The only way to allow Covidien to continue to invest its OUS cash in the U.S. without incurring an incremental U.S. tax was to structure this acquisition as an inversion," Medtronic wrote. "While this does not change the accessibility to Medtronic’s cash, we will go from having the ability to use 33% of our overall cash-flow, to the ability to use 60% of the combined company’s cash flow."
Medtronic added that it plans to add an extra $10 billion to its U.S. investments over the next decade.
"Currently, all cash generated outside of the U.S. is subject to full U.S. federal income tax when used for investment in the U.S.," Medtronic wrote. "For this reason we consider it ‘trapped’ and accessible only for OUS investments."
See the interactive graphic here.