Medtronic Bid for Rival Spurred by Tax Savings

Medtronic, the US-based medical product manufacturer, is paying US$42.9bn for a rival in Ireland and plans to reincorporate in the country.

The deal makes Minneapolis-based Medtronic the latest – and so far the biggest – US company to try to change its tax domicile through a so-called inversion. Such deals are attractive to American companies seeking a lower corporate tax rate.

However, the company stressed that the purpose behind the purchase for Ireland’s Covidian was also to access billions in cash trapped overseas.

“The combined company should generate significant free cash flow, which can be deployed with much greater flexibility,” Medtronic’s chief executive (CEO), Omar Ishrak, said in a conference call with analysts.

Medtronic stressed that it intends to use its strengthened balance sheet to invest US$10bn in the US over the next 10 years, in an effort both to appease critics of inversions, and to emphasise the importance of the US for the medical device industry.

“The only reason they’re doing the inversion is to free up the cash overseas,” Bill George, Medtronic’s former CEO, said in an interview. “That money today can’t be put to good use right now.”

Nonetheless, by shifting its business headquarters in Ireland Medtronic will avoid paying US taxes when it wants to move money between its overseas and US subsidiaries. The debate over ‘repatriation’ of overseas profits to the US has been ongoing for three years, with business leaders, lobbying for a tax holiday.

Although Ireland’s corporate tax rate of 12.5% compared with a rate of 35% paid by many US corporations, the rate paid by Medtronic in 2013 was only 18.3% according to RBC Capital Markets.

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