The White House is looking to clamp down on companies that relocate their headquarters overseas in order to benefit from lower tax rates, a measure that could have implications for Medtronic’s (NYSE:MDT) $43 billion mega-merger with Covidien (NYSE:COV).
Part of the Medtronic-Covidien deal includes shifting Medtronic’s official headquarters from Minnesota to Covidien’s base in Ireland, allowing Medtronic to take advantage of the country’s more favorable corporate tax rate in a move called a corporate inversion.
The White House this week urged congressional tax committee leaders to "prevent companies from effectively renouncing their citizenship to get out of paying taxes."
In a letter obtained by the Wall Street Journal last night, Treasury Secretary Jacob Lew asked lawmakers to support the Obama Administration’s proposal to prohibit companies from changing their corporate tax domicile unless there is a change in control of the company itself. The proposal would be retroactive to early May 2014, meaning that it would impact the Medtronic-Covidien deal.
"What we need as a nation is a new sense of economic patriotism, where we all rise or fall together," Lew wrote. "We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes."
Lew asked Congress to pass swift legislation to take the wind out of the rising trend of companies seeking inversion deals, and for lawmakers to further address the exodus through broader tax reform.
Medtronic and Covidien have maintained that their merger wasn’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."
Nevertheless, the merger will allow Medtronic to tap the billions currently stored in outside-U.S. tax havens without having to pay U.S. corporate taxes upon repatriation.
A measure prohibiting inversions may not be a deal-breaker for Medtronic and Covidien, but many new acquisition negotiations include provisions that allow buyers to walk away from deals penalty-free should a tax benefit disappear, the Wall Street Journal reported.
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 merger closes later this year or early in 2015.