Medtronic Caught in Obama Crackdown on Inversion DealsMedtronic Caught in Obama Crackdown on Inversion Deals

Shares of Medtronic and Covidien were both trading down on Tuesday--a day after the Obama administration took actions that call into question the tax benefits Medtronic was set to enjoy from the proposed $43 billion merger. The Medtronic-Covidien deal and others like it have drawn ire from Obama and other progressive politicians because they involve American companies using mergers with overseas companies to move their headquarters out the country. President Barack Obama said in a statement that the actions announced Monday by Treasury Secretary Jacob J. Lew are meant to "discourage companies from taking advantage of corporate inversions--moving their tax residence overseas on paper to avoid paying their fair share in taxes here at home.""We've recently seen a few large corporations announce plans to exploit this loophole, undercutting businesses that act responsibly and leaving the middle class to pay the bill, and I'm glad that Secretary Lew is exploring additional actions to help reverse this trend," Obama said.Medtronic spokesman Fernando Vivanco told Qmed that company officials are studying the Treasury Department's actions. "We will release our perspective on any potential impact on our pending acquisition of Covidien following our complete review," Vivanco said. Fridley, MN-based Medtronic's stock was down more than 3%, to $63.91 per share, in late Tuesday afternoon trading on the New York Stock Exchange, and Dublin, Ireland-based Covidien's stock was down more than 2%, to $88.17 per share, on the same exchange. Democrats in both chambers of Congress agree and are supporting a law to limit such deals in the future. But the chances of Congress passing such legislation in the near future are limited.As a result, the Obama administration made good on its promise to take action on its own to at least make inversion deals less attractive. The Treasury Department, for example, is cracking down on many of the financial mechanisms--from so-called "hopscotch loans" to stock transaction mechanisms--that inverted companies use to access the overseas earnings of foreign subsidiaries of the U.S. company that inverts without paying U.S. tax. It is exactly such financial mechanisms that Medtronic was expected to utilize after merging with Covidien and moving its official headquarters to Ireland..The Treasury Departments actions applied to deals that hadn't closed as of Monday.Any congressional or IRS action could give either Medtronic or Covidien the ability to step away from the deal. The companies had expected the merger to close in late 2014 or early 2015.The tax inversion deals, which have been termed the "holy grail of tax avoidance" by a number of U.S. politicians, have been picking up recently as a growing number of companies look for ways to reduce their tax burden. As many as 25 U.S. companies are considering relocating their headquarters to low-tax destinations, according to the Irish Times.The corporate tax rate in the United States is 35%--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. Medtronic has also pointed out that the U.S. is one of only six OECD countries that imposes on its businesses the world-wide taxation of corporate profits.Inversion was supposed free up billions of dollars for Medtronic that company officials say could then be invested back in the United States. Meanwhile, Medtronic isn't the only medtech company facing criticism over potentially moving its headquarters overseas. Hospira is also taking flak--even though it is only rumored so far to be in talks with French company Danone for a so-called "inversion" deal.

Chris Newmarker is senior editor of Qmed and MPMN. Follow him on Twitter at @newmarker.

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