As taxes on medical device and drug companies continue to increase, many are finding loopholes to avoid paying. President Barack Obama recently had choice words for these companies, which now include orthopedic and spine market giant Medtronic.
In an unsurprising move — given Medtronic CEO Omar Ishrak's plans to grow the company — Medtronic acquired Ireland-based Covidien for $42.9 billion in May.
The company also plans to move its headquarters overseas when the transaction completes, epitomizing the tax inversion strategy becoming more common post-healthcare reform. The company would be taxed at 12.5 percent in Ireland, compared to 35 percent in the United States. Prior to Medtronic's acquisition, it was rumored the company was interested in London-based Smith & Nephew, which would have afforded a similar opportunity to move headquarters overseas.
While some might herald the move as a necessary business strategy, President Obama hasn't taken kindly to this trend. He hopes to close the tax loophole that allows companies to set up corporate headquarters overseas and avoid paying United States taxes, according to a My Fox Twin Cities report.
"Even as corporate profits are as high as ever, a small but growing group of big corporations are fleeing the country to get out of paying taxes. They're keeping most of their businesses inside the United States, but they're basically renouncing their citizenship and declaring that they're based somewhere else, just to avoid paying their fair share," said President Obama in his address, as reported by Fox.
Indeed, Medtronic's total worldwide revenue for the third quarter of the 2014 fiscal year was slightly up from the same period last year, reaching $4.1 billion. The United States surgical technologies revenue spiked during the third quarter from $215 million in 2013 to $241 million in 2014. As a combined company, Medtronic and Covidien have $13 billion revenues outside of the United States.
The acquisition was announced in June and then Medtronic cut 80 jobs from its Minnesota location in July. However, the company also announced it pledged to create 1,000 Minnesota jobs. The company hopes to complete it's acquisition by the end of this year or beginning of next year, but there are a few roadblocks; shareholders from both Medtronic and Covidien have sued to stop the transaction.
Part of the suit against Medtronic alleges if the company combines with Covidien to form a new company — Medtronic PLC — and headquarters are moved overseas, there would be substantial loss for Medtronic stockholders. The suit alleges Medtronic stockholders pay taxes on gains and those who have held the stock for more than one year stand to see federal tax rates jump 15 percent to 30 percent on the gain.
However, Medtronic plans to defend their position in court and stated allegations in the lawsuit are "without merit."
Mega-mergers are on the rise in the device industry, especially among orthopedic device companies who are scrambling for a place at the top. Medtronic is one of the largest players in the market, and announced it would commit $10 billion in technology investments over the next 10 years in areas such as early stage venture capital investments, acquisition and research and development in the United States when the Covidien agreement was announced.
The companies may want to speed the deal along as quickly as possible; legislation is currently moving through the Senate that would close the loophole, although some insiders believe it won't move past the Senate floor. Mr. Ishrak was asked to testify before a Senate committee on why he plans to move the company headquarters overseas, but declined.