So, the $13.9 billion question is, could the Obama administration's tax regulations that are designed to stem inversions scupper the Medtronic-Covidien deal, to quote a headline on the FierceMedicalDevices website? At this point, no one really knows, although shares of both companies were trading down today. Medtronic holds approximately $13.9 billion in cash and equivalents overseas; it intends to loan some of that money to Covidien, once the deal has been finalized, and thus avoid paying U.S. taxes on it. "Because the loans allow the company's cash to skip past the former U.S. parent company, they're known as hopscotch loans," writes Zachary R. Mider on businessweek.com. The rules released by the Treasury Department restrict this practice.
Medtech giant Medtronic announced in June that it planned to acquire Covidien and reincorporate in low-tax Ireland, where Covidien is headquartered. There is a provision in the deal allowing either company to back out should tax laws change.
The 35% U.S. corporate tax rate is the highest nominal rate in the world, leading a number of companies to look for new domiciles in low-tax nations such as Ireland, the United Kingdom, Switzerland, and the Netherlands, writes Chris Newmarker on qmed.com. Medtronic has also pointed out that the United States is one of only six OECD countries that imposes on its businesses the worldwide taxation of corporate profits, he adds.
It's no surprise then that companies will look for loopholes, and for some of them inversions make a lot of financial sense. Main Street, however, is not buying it. According to a poll in the Minneapolis Star Tribune, 68% of Minnesota residents, where Medtronic is headquartered, said that they disapproved of companies moving outside the United States to obtain tax benefits. President Obama vowed to take action to make these deals less attractive, and the 42 pages of new rules announced by Treasury Secretary Jacob Lew on Monday made good on that promise. The rules apply only to pending deals, such as the Medtronic-Covidien transaction, not to companies that have already finished their transaction. But will they be effective? Not a chance, writes Ryan Ellis on forbes.com.
"I've got bad news for the Treasury Department: Every large company in America has a team of super smart accountants who have already come up with ways around these new regulations," writes Ellis. "Regulations will never be able to catch up with the ingenuity of super smart accountants in suspenders who think depreciation jokes are funny. Not gonna happen."
Until we lower the corporate income tax rate from 40% to under 25% and eliminate double taxation on income earned abroad, inversions will continue to happen, Ellis continues. Of course, executive action has its limits, and more comprehensive reform would require the involvement of Congress.
Yeah, there's the rub.