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Corporate complaints about US taxes spur first major move overseas Corporate complaints about US taxes spur first major move overseas
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Healthcare giant Medtronic has paid $42.9bn for a rival firm based in Ireland in one of the biggest corporate moves designed in part to avoid paying taxes to the US government. Medtronic makes medical products like pacemakers and stents, and has billed the acquisition of Ireland-based Covidian as a move to become more global in its reach in a competitive market for healthcare companies. Still, taxes define a major strategy for the deal. The US tax code, with its top corporate tax rate of nearly 40%, has been presented as a major irritant by influential business leaders, including former General Electric CEO Jack Welch and former Citigroup CEO Sanford Weill, who complained on CNBC that "We have the highest corporate tax rate in the world. It should be a wake up call to our government that the problem is the tax code, it's not a problem with what the companies are doing."Much Wall Street research joins the chorus of corporate complaints on taxes. "The only major economies to apply local corporate taxes at an elevated rate of around 10% are Japan, the US and Germany," Barclays Capital noted in a recent research report.Healthcare giant Medtronic has paid $42.9bn for a rival firm based in Ireland in one of the biggest corporate moves designed in part to avoid paying taxes to the US government. Medtronic makes medical products like pacemakers and stents, and has billed the acquisition of Ireland-based Covidian as a move to become more global in its reach in a competitive market for healthcare companies. Still, taxes define a major strategy for the deal. The US tax code, with its top corporate tax rate of nearly 40%, has been presented as a major irritant by influential business leaders, including former General Electric CEO Jack Welch and former Citigroup CEO Sanford Weill, who complained on CNBC that "We have the highest corporate tax rate in the world. It should be a wake up call to our government that the problem is the tax code, it's not a problem with what the companies are doing."Much Wall Street research joins the chorus of corporate complaints on taxes. "The only major economies to apply local corporate taxes at an elevated rate of around 10% are Japan, the US and Germany," Barclays Capital noted in a recent research report.
Some governments have been responsive to the corporate grievances against taxes. Japan, which imposes both federal and local taxes on companies, plans to grow its economy by cutting corporate taxes, according to Barclays Capital. In business circles, Medtronic will be regarded as the first major US company to make a point of moving for tax reasons, and thus as a conscientious objector among businessmen to US tax rates. For several years, big companies have been agitating for a "tax holiday" in which they can reclaim some of their overseas profits and pour them back into US operations while avoiding US tax rates. Medtronic's strategy to avoid taxes for the deal will have two major components, according to MKM Partners's managing director Keith Moore. The first is buying a smaller company for its headquarters in another country with lower taxes guarantees lower future tax payments, a technique called "tax inversion" in corporate circles. That is potential new trend following the move of Chiquita to buy Ireland-based Fyffes for $1bn in March. Some governments have been responsive to the corporate grievances against taxes. Japan, which imposes both federal and local taxes on companies, plans to grow its economy by cutting corporate taxes, according to Barclays Capital. In business circles, Medtronic will be regarded as the first major US company to make a point of moving for tax reasons, and thus as a conscientious objector among businessmen to US tax rates. For several years, big companies have been agitating for a "tax holiday" in which they can reclaim some of their overseas profits and pour them back into US operations while avoiding US tax rates. Medtronic's strategy to avoid taxes for the deal will have two major components, according to MKM Partners's managing director Keith Moore. The first is buying a smaller company for its headquarters in another country with lower taxes guarantees lower future tax payments, a technique called "tax inversion" in corporate circles. That is potential new trend following the move of Chiquita to buy Ireland-based Fyffes for $1bn in March.
Another reason is that having business headquarters in Ireland means Medtronic won't have to pay US taxes when it wants to move money between its overseas and US subsidiaries. That debate over "repatriation" of overseas profits to the US has raged for over three years among business leaders, who have called for a tax holiday. President Obama has courted the attention – and donations – of CEOs with promises to consider such a tax holiday."The Covidien deal is also a continuation of the trend toward structuring deals for tax considerations. Medtronic is trying to capitalize on both tax inversion, using Covidien’s Irish corporate structure, as well as using overseas cash to avoid US repatriation taxes," wrote MKM's Keith Moore in a research note. While many companies have been complaining about the increasing burden of US corporate tax rates, there is no evidence that their tax burden has risen. The tax code has remained largely stagnant and corporate rates have remained roughly unchanged since 1980. Medtronic's tax rate, in particular, was less than half what the US expects most companies to pay. The company's tax rate was 18.3% in 2013 according to RBC Capital Markets – far below the top US tax rate of nearly 40%. Ireland's tax rate is 12.5%, according to KPMG. The gulf between the US tax rate and that of Ireland is not as deep as it first appears, however. In general, US companies made less in profit and paid more in taxes in 2013 due in part to the end of a major tax break that allowed companies to write off purchases of heavy equipment. That tax break pushed the effective US corporate tax rates to 12%, the lowest in decades. It also fattened company profits, especially among industrial and manufacturing companies. Due in part to the demise of that tax discount, companies saw lower profit margins in the first three months of 2014 and will continue see lower profit margins this year, predicted Goldman Sachs. In real dollar terms, Medtronic's taxes did not appear burdensome. For instance,the company's total sales were $16.58bn in 2013, while its tax burden amounted to about $865m in payments in 2013. RBC Capital Markets projected before the merger that Medtronic's tax payments would fall to $852m in 2014. Another reason is that having business headquarters in Ireland means Medtronic won't have to pay US taxes when it wants to move money between its overseas and US subsidiaries. That debate over "repatriation" of overseas profits to the US has raged for over three years among business leaders, who have called for a tax holiday. President Obama has courted the attention – and donations – of CEOs with promises to consider such a tax holiday."The Covidien deal is also a continuation of the trend toward structuring deals for tax considerations. Medtronic is trying to capitalize on both tax inversion, using Covidien’s Irish corporate structure, as well as using overseas cash to avoid US repatriation taxes," wrote MKM's Keith Moore in a research note. While many companies have been complaining about the increasing burden of US corporate tax rates, there is no evidence that their tax burden has risen. The tax code has remained largely stagnant and corporate rates have remained roughly unchanged since 1980. Medtronic's tax rate, in particular, was less than half what the US expects most companies to pay. The company's tax rate was 18.3% in 2013 according to RBC Capital Markets – far below the top US tax rate of nearly 40%. Ireland's tax rate is 12.5%, according to KPMG. The gulf between the US tax rate and that of Ireland is not as deep as it first appears, however. In general, US companies made less in profit and paid more in taxes in 2013 due in part to the end of a major tax break that allowed companies to write off purchases of heavy equipment. That tax break pushed the effective US corporate tax rates to 12%, the lowest in decades. It also fattened company profits, especially among industrial and manufacturing companies. Due in part to the demise of that tax discount, companies saw lower profit margins in the first three months of 2014 and will continue see lower profit margins this year, predicted Goldman Sachs. In real dollar terms, Medtronic's taxes did not appear burdensome. For instance,the company's total sales were $16.58bn in 2013, while its tax burden amounted to about $865m in payments in 2013. RBC Capital Markets projected before the merger that Medtronic's tax payments would fall to $852m in 2014.
While the merged Medtronic-Covidian would be based in Ireland for tax reasons, Medtronic's headquarters, with over 8,000 employees, would remain in Minneapolis.While the merged Medtronic-Covidian would be based in Ireland for tax reasons, Medtronic's headquarters, with over 8,000 employees, would remain in Minneapolis.