Medtronic to buy Irish rival for $43B, raising concerns on tax loophole

U.S. medical device manufacturer Medtronic has agreed to buy Ireland-based competitor Covidien for $42.9 billion in cash and stock.

The combined company would have its executive offices in Dublin, where it will benefit from Ireland’s significantly lower corporate tax rates. But the merged company would continue to operate in Minneapolis, where Medtronic employs more than 8,000, the companies said late Sunday in a release.

Medtronic makes pacemakers and insulin pumps, among other products, while Covidien specializes in surgical equipment.

The move is the latest in a series of efforts by domestic companies to use mergers to reincorporate overseas for tax reasons, otherwise known as tax inversion, and it has raised concern among some U.S. lawmakers. Ireland taxes corporate income at 12.5 percent, compared with a top marginal rate of 39.6 percent in the United States, according to the tax advisory firm KPMG.

For example, drug-maker Pfizer recently tried unsuccessfully to acquire U.K.-based Astra-Zeneca, and would have moved its corporate headquarters to the U.K. The banana distribution company Chiquita agreed to buy an Irish firm, Fyffes, in March.

According to a recent report, the majority of Fortune 500 companies stash their cash away from the reach of United States authorities in tax havens around the world, keeping $90 billion out of the country’s coffers. In 2013, Apple, GE, Microsoft, Pfizer and Merck rounded out the top five in the amount of profit held offshore in subsidiary shell companies, according to the study, conducted by the U.S. Public Interest Research Group and the Center for Tax Justice.

However, Medtronic said it was driven by a complementary strategy with Covidien on medical technology rather than tax considerations.

"The real purpose of this, in the end, is strategic, both in the intermediate term and the long term," Medtronic Chief Executive Omar Ishrak told Reuters in an interview after the deal was announced. "It is good for the U.S. in that we will make more investment in U.S. technologies, which previously we could not."

As a result of savings from the deal, Medtronic said it would spend an additional $10 billion over the next decade in investments, acquisitions and research and development in the United States.

Since 2008, about two dozen U.S. companies have used the tax inversion strategy, versus about the same number over the previous 25 years, according to a Reuters review of transactions.

Ireland, the Netherlands, Switzerland, Canada and Britain have lately been the most common destinations of U.S. companies seeking new tax domiciles. The U.K. tax rate for companies is due to drop to 20 percent from 21 percent next year.

Some U.S. lawmakers are concerned that the deals erode government revenue by giving corporations another tax-avoiding loophole. Two bills in the U.S. Congress and a White House proposal would make inversions harder to do, but neither has gained much traction. Republicans have expressed concern about inversions, but have not put forward legislation of their own.

In its latest report, the Organization for Economic Cooperation and Development recommended that the U.S. lower its corporate tax rate to accelerate domestic growth.

Some lawmakers have said that anti-inversion curbs should be tackled as part of a comprehensive overhaul of the loophole-riddled U.S. tax code, but this is a difficult project that Congress has not tackled since 1986.

"These transactions are about tax avoidance, plain and simple," Sen. Carl Levin, D-Michigan, who introduced a bill in May to restrict the deals, said in a release. "Our legislation would clamp down on this loophole to prevent corporations from shifting their tax burden onto their competitors and average Americans."

Wire services