Medtronic shrugs off new Treasury inversion rules

Medtronic (NYSE:MDT) today shrugged off new U.S. Treasury Department rules that clamp down on so-called “inversion” deals that move U.S. companies to foreign tax jurisdictions.

In an inversion, a U.S. company typically buys a smaller foreign rival and relocates, at least on paper, to the rival’s home country so the new combined company is not U.S.-based, though core management usually stays in the United States. Medtronic, which early this year closed a $50 billion merger with Covidien, moved its domicile from Minnesota to Ireland with the deal.

The new Treasury rules, effective immediately following their release yesterday, limit U.S. acquirers’ ability to set up a new foreign parent in a 3rd country and to “stuff” assets into a foreign parent to meet existing limits on post-inversion ownership levels.

Treasury will also now require that an inverted company be tax-resident in its new home country under that country’s rules, not just U.S. law, to pass a test of whether it has 25% of its business activity in the new country. Passing that means it can be recognized as a foreign company. The bureau is also imposing a rule, retroactive to September 2014, limiting an inverted company’s ability to transfer foreign operations to the new foreign parent after an inversion transaction without paying U.S. taxes.

No action was taken to curb inversion-related “earnings stripping,” in which U.S. companies shift U.S. profits offshore to avoid U.S. taxes, but Treasury secretary Jack Lew said the agency would continue to examine that issue and others.

U.S. companies are still taking advantage of the law “to move their tax residence overseas to avoid paying taxes in the U.S., without making significant changes in the nature of their overall operations,” Lew said in prepared remarks.

“While we intend to take additional action in the coming months, there is only so much the Treasury Department can do to prevent these tax-avoidance transactions. Only legislation can decisively stop inversions,” he said.

Medtronic said the new rules “do not have a material financial impact on the company.”

“Medtronic will continue to more fully assess [the new Treasury rules] and will provide appropriate disclosure concerning any potential material impact on the company as necessary,” the company said. “Medtronic’s acquisition of Covidien, which closed in January of 2015, was undertaken for strategic reasons and has created a company that is positively impacting the lives of more patients, in more ways and in more places around the world.”

Material from Reuters was used in this report.

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