A handful of Democrats in Congress are hoping to curb a corporate exodus by threatening to withhold federal contracts from firms that shift their headquarters overseas to benefit from lower tax rates.
The law could be a major hit for Medtronic (NYSE:MDT), which plans to use its $43 billion acquisition of Covidien (NYSE:COV) to relocate its official headquarters from Minnesota to Ireland in a so-called "corporate inversion." Just last year Medtronic won a $58 million Defense Dept. contract with 6 options to renew.
A quartet of Senators introduced a new measure, dubbed the "No Federal Contracts for Corporate Deserters Act," to take some of the shine off of inversions. The bill would ban inverters from bidding for or winning federal contracts, saying that such companies have claimed as much as $1 billion in government dollars in the past 5 years.
There are already regulations on the books to restrict funds to inverters, but "just like with the tax code, corporations have begun to find loopholes in the contracting restriction," according to a statement issued by Senator Carl Levin (D-Mich.).
The new bill would make permanent existing year-to-year bans, allow agencies to cut contracts with companies that subcontract with inverters, cut the legs off of indefinite delivery contracts and maintain an exception that allows agency heads to waive the requirements "in the interest of national security."
"With every successful inversion, the tax burden increases on the rest of us to pay what the corporate inverter doesn’t," fellow sponsor Dick Durbin (D-Ill.) said in prepared remarks. "The burden is made worse by allowing companies to profit off of federal contracts paid for by U.S. taxpayers, while those very companies run from their U.S. tax responsibility. We should make permanent the longstanding ban on federal contracts for corporations that have renounced their American corporate citizenship."
Senator Carl Levin (D-Mich.) and Representatives Rosa DeLauro (D-Conn.) and Lloyd Doggett (D-Texas) joined Durbin in introducing the bill, but they are not the first to take a swing at corporate inverters.
The White House has also sponsored measures to clamp down on offenders by prohibiting companies from changing their corporate tax domicile unless there is a change in control of the company itself. The proposal would take effect retroactively to early May 2014, meaning that it would impact the Medtronic-Covidien deal.
Medtronic and Covidien have maintained that their merger isn’t motivated by the inversion, saying that the main drivers are 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."
Nevertheless, the merger will allow Medtronic to tap the billions currently stored outside the U.S. without having to pay U.S. corporate taxes upon repatriation.
Covidien moved its headquarters to Ireland in 2009, saying at the time that the company hoped to benefit from the lower corporate tax rate there. Medtronic plans to make the same move once the merger closes later this year or early in 2015.