Medtronic May Have to Pay a Lot More for CovidienMedtronic May Have to Pay a Lot More for Covidien

Despite recent changes in U.S. tax rules that make corporate tax inversions less lucrative, neither Medtronic nor Covidien appear to be backing away from their $43 billion deal.

The new rules make it more expensive for Medtronic (Fridley, MN) to buy Ireland-based Covidien, potentially requiring Medtronic to borrow money instead of using cash held abroad, according to a Reuters report.

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.

A Medtronic spokesman declined to comment on the Reuters report, reiterating the company's initial statement.

"We are studying Treasury's actions," said Fernando Vivanco. "We will release our perspective on any potential impact on our pending acquisition of Covidien following our complete review."

Vivanco declined to comment on how long the corporate review would take.

Covidien did not immediately respond to Qmed's request for comment on the future of the deal. However, Covidien CEO Jose Almeida wrote in an SEC filing last week that Medtronic and Covidien are moving toward consummating the deal and are continuing integration planning while evaluating the new tax rules.

President Obama has defined corporations that pursue inversions as "moving their tax residence overseas on paper to avoid paying their fair share in taxes here at home."

Reuters quoted unnamed "people familiar with the matter," who speculated that Covidien may need to lower its asking price and accept more stock and less cash to comply with the new rules.

If the rules had been laws, the corporations' deal would have allowed Medtronic to walk away unscathed, the Reuters report said. However, because the U.S. changed the rules, Medtronic could be out $850 million if it abandons the arrangement. That breakup fee would vanish if shareholders of either corporation vote down the deal, the Reuters story said.

The companies had expected the merger to close in late 2014 or early 2015.

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, Qmed has reported. 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 impose on its businesses the worldwide taxation of corporate profits.

Medtronic has an effective tax rate of 18 percent, similar to that of Covidien, according to the Reuters report. Medtronic has said the combined company's tax rate would decline by one or two percentage points.

Inversion was supposed free up billions of dollars for Medtronic that company officials say could then be invested back in the United States.

Nancy Crotti is a contributor to Qmed and MPMN.

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