Possible hurdle for Medtronic-Covidien deal: Congress

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The $43 billion deal Medtronic announced late Sunday to acquire Ireland-based competitor Covidien – and save the newly merged company a bundle on U.S. taxes – is not yet a done deal.

One possible hurdle: Congress.

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.

But some lawmakers have taken a critical view of "tax inversions" – U.S. corporations in effect shifting operations offshore to places like Ireland, which has a 12.5 percent corporate tax rate, compared to 35 percent in the U.S.

Now the New York Times' Dealbook blog reports that the terms negotiated by Medtronic identify two circumstances under which Medtronic would be allowed to kill the deal before it happens: One, an IRS objection. And two, if Congress creates a new law that changes tax inversion rules.

In fact, there is such a bill in play on Capitol Hill, introduced last month by Sen. Carl Levin, D-Michigan – the clearly titled Stop Corporate Inversions Act of 2014.

"Essentially, the problem we have today is that a U.S.-based multinational can file a change-of-address card with the United States simply by acquiring an offshore company that is a fraction of the U.S. company’s size. Our bill would ensure that any inversion meets a more stringent test," Levin said.

The legislation's future in Congress is unclear. President Barack Obama’s 2015 budget proposal to Congress contains a similar provision, and while there's also a House version, one financial industry group says it has no Republican support on the Hill.

That may not be quite true, or it may be changing. One House Republican, Rep. Erik Paulsen, who represents Fridley, told the Star Tribune, “We’re seeing one of our good homegrown Minnesota companies make decisions based on a broken tax code. It shows why reform is needed.”

And the intensity of debate over tax inversions seems to be rising. Last month, pharmaceutical giant Pfizer Inc. scrapped its plans to obtain the British company AstraZeneca PLC, perhaps in small part because it was under fire over the tax benefits the deal would reap.

Medtronic has been quick to note that while it planned to legally incorporate its new venture in Ireland, the global medical device company's headquarters will remain in Minnesota, and corporate officials plan big new investments in the U.S.

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