Report: IRS agrees to slash Medtronic’s $1.4B transfer pricing tax tab by an order of magnitude

The U.S. Internal Revenue Service reportedly agreed to drastically slash the amount it claims Medtronic (NYSE:MDT) owes on loans between its subsidiaries, from a potential $1.36 billion to just $14 million.

Last summer, a federal tax judge found for the Fridley, Minn.-based company in its lawsuit against the IRS over the dispute, which involves “transfer pricing” among the company’s various units during the tax years 2005 and 2006. The tax bureau claimed Medtronic owed income tax of $548.2 million for 2005 and $810.3 million for 2006; the Fridley, Minn.-based company disputed the bill and took the case to the U.S. Tax Court. Judge Kathleen Kerrigan found in June that Medtronic proved that the IRS was “arbitrary, capricious, or unreasonable” in its interpretation of the transfer pricing for its Puerto Rico subsidiary.

In transfer pricing, income is allocated among branches in different countries. It’s a legal tax maneuver companies can use to attribute profits from a product made and sold in the U.S. to a unit in a foreign country. If Kerrigan’s ruling had gone the other way, the IRS could have dunned Medtronic for extra taxes from 2007 on. Medtronic has said it expects to repatriate between $500 million and $4.5 billion in overseas cash once the dispute is put to bed.

This month the revenuers agreed to use a much smaller figure, $38.9 million, to calculate what Medtronic owes on transfer pricing for 2005 and 2006 combined. That means a tax tab of just $14 million, according to Law360.com.

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