Medtronic hired two former Senators to lobby against a national bill that would crack down on a tax-altering procedure known as tax inversion – legislation that could put its purchase of Dublin-based Covidien at risk, the Star Tribune reports.
(Note: Corporate tax laws can be confusing and boring to read, because people usually use industry lingo that most of us aren't tuned in to. We get that. So for a brief, simple look at what the heck "tax inversion" is, check out the text box at right.)
What is Tax Inversion?
Tax inversion is a fairly simple concept: A U.S. company buys, or merges with, a foreign company located in a country with lower tax rates. That foreign company is often smaller than the U.S. company purchasing it. The new merged company then renounces its U.S. citizenship and changes its legal address to one from that foreign country.
However, its headquarters and operations stay based in the U.S. – even though the legal address (also called its "corporate domicile") is now outside the country.
So rather than a U.S.-based company owning pieces in another country, it becomes another country's business that owns large pieces in the United States.
As Stephen Colbert explained, "It's like me adopting an African child, then claiming myself as his dependent."
What does that do? It allows the company to avoid paying the same U.S. corporate tax it would have if it kept its legal address in the U.S. Money earned overseas can then be re-introduced into the American economy through some specific deals, without being subject to that 35 percent corporate tax rate.
OpenSecrets.org, which tracks lobbying and spending in politics, shows Medtronic paid $200,000 to retain the services of Squire Patton Boggs. Among the five lobbyists on the team are former Sens. Trent Lott (a Republican who represented Mississippi) and John Breaux (a Democrat from Louisiana). It's the most the company has paid in outside lobbying group so far this year.
The proposed acquisition would also allow Fridley-based Medtronic tax-free access to billions of dollars it earned overseas and stored in foreign accounts. The company would become the biggest American firm yet to shed its U.S. tax status.
The U.S. tax rate is 35 percent, the highest among developing countries, Zach Mider with Bloomberg News explains in a video.
Forbes has a list of countries with the lowest corporate tax rate. Ireland is on there, at 12.5 percent.
President, Congress explore changes
But elected officials are pushing back, exploring a new law that would change tax inversion rules and kill the deal.
Medtronic is one of 22 companies that's announced a tax inversion deal since 2011, the New York Times reported, and the number of companies attempting the move jumped from three back in 2011, to 10 already this year alone. Medtronic's deal to merge with Ireland-based Covidien is worth $47.9 billion – the third-largest such inversion deal so far, according to the Times.
In an effort to prevent anything from happening to derail the Covidien deal, Medtronic purchased the services of Breuax and Lott's lobbying effort. In a statement to the Star Tribune, a company spokesman said it "routinely" hires outside help.
Medtronic, according to OpenSecrets' company lobbying page, has spent between between $4 million and $5.5 million annually on lobbying since 2008. Prior to that, the company hadn't spent more than about $2.2 million (with records dating back to 1998).
Walgreen's recently threatened to move overseas, a potential tax loss of $4 billion a year, the Washingon Post explained. But the company, facing backlash, reversed its decision.
Measures stalled in Congress
The bills themselves aren't sure things, the Biz Journal noted. Republicans and Democrats can't agree on how to best address the issue, the Associated Press explained, so President Barack Obama is looking into ways his administration can make tax inversion deals less enticing without going through the House and Senate.
In an interview with CNBC in late July, Obama called tax inversion maneuvers "gaming the system."
"I think most people would say: If you're doing business here, if you're basically still an American country, but you're simply changing your mailing address to avoid paying taxes, then you're really not doing right by the country and by the American people," he told the station.
It's a public stance Obama has increasingly taken. BidnessETC described it as "Obama's war against tax inversion."