The U.S. Department of the Treasury is implementing new rules and restrictions in order to deter companies from moving their headquarters overseas to avoid paying certain American taxes, the department announced Monday.
The increasingly popular moves – known as tax inversions – have drawn the ire of President Barack Obama, and Minnesota's Medtronic is one of the largest businesses to eye such a deal.
The proposed acquisition of Dublin-based Covidien – worth a reported $42.9 billion – would 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.
(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.
A Star Tribune Minnesota poll released Sept. 20 shows 68 percent of Minnesotans believe corporations should not be allowed to execute such corporate inversion deals. Only 26 percent of respondents said yes, the deals should be allowed.
The deterrents announced by the Treasury Department Monday do a number of things: change access to so-called "hopscotch loans," prevent companies from restructuring a foreign subsidiary in order to get tax-free money, up the ownership requirements for former U.S. owners, and more. (You can read many of the details here, but note it's all intricate business law language.)
They will apply to any deal that is finalized from Sept. 22 on.
MPR reports Medtronic may be liable for an $850 million fee if the deal with Covidien doesn't go through.
“These first, targeted steps make substantial progress in constraining the creative techniques used to avoid U.S. taxes, both in terms of meaningfully reducing the economic benefits of inversions after the fact, and when possible, stopping them altogether,” said Treasury Secretary Jacob J. Lew in a statement. “Treasury will continue to review a broad range of authorities for further anti-inversion measures as part of our continued work to close loopholes that allow some taxpayers to avoid paying their fair share.”
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.
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.