Medtronic ($MDT) is looking forward to reaping the benefits of its new Irish domicile after its $42.9 purchase of Covidien ($COV), but the tax inversion process will not be a walk in the park, according to tax experts.
Through its acquisition of Covidien, Minneapolis-based Medtronic will enjoy a lower overall tax rate and more overseas cash in its pocket to spend in the U.S. But freeing Medtronic's future international earnings from the complicated U.S. tax web will require some finessing, and does not provide automatic access to revenue, The Wall Street Journal reports.
"These companies are betting on future success," Kent Wisner, corporate tax adviser at Alvarez & Marsal Taxand, told the WSJ. "Some are merely setting the stage for future businesses not yet started or barely started that will be under the new foreign entity."
One way domestic companies try to avoid paying U.S. taxes is to transfer international assets and cash into a new parent company. But funneling money into a foreign-based operation comes with a hefty U.S. tax bill on the fair market value of those assets, Wisner said. Companies can avoid the taxes by arranging an asset sale between its subsidiaries, but proceeds would still funnel back to the U.S. foreign subsidiary, defeating the purpose of an inversion, tax experts told the WSJ. And for Medtronic, which hasn't paid U.S. taxes on more than $20.5 billion of accumulated overseas earnings in foreign subsidiaries since last April, the option is even less appealing.
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| Medtronic CEO Omar Ishrak |
Another strategy companies can use to avoid paying U.S. taxes once they move operations abroad is to create new subsidiaries for new products or revenue sources. As Washington University in St. Louis law professor Adam Rosenzweig told the WSJ, the company still has to pay U.S. taxes on the fair-market value of the assets, but can avoid a large tax hit by arguing that the assets aren't generating much revenue. A new foreign-based company could essentially "freeze" its subsidiaries, and potentially avoid paying U.S. taxes on future generations of products.
Medtronic remains mum for the most part about how it will reduce its tax burden moving forward. But CEO Omar Ishrak envisions a smooth transition, he said during Monday's conference call with investors.
"A large part of the organization can run their businesses the way they were running it," Ishrak said. There's a certain pragmatic limit to how fast we can move. But I'm optimistic that we can move pretty quickly in getting this cash to work for us."
- read the WSJ story (sub. req.)