Could Medtronic Move R&D To Ireland For Tax Purposes?
In the eyes of developed nations, Ireland has become notorious for baiting multinational firms to its land with the offer of friendly tax treatment. By using a 12.5 percent corporate tax rate, highly profitable companies — largely in the technology industry — have been establishing operations throughout Ireland.
However, on Tuesday, Ireland’s finance minister said the country would halve its corporate tax rate to 6.25 percent for innovative companies: ones with earnings tied to patents, copyrights or other research and development (R&D) created in Ireland. (Comparatively, the OECD Tax Database notes that the U.S. corporate tax rate is 35 percent at the federal level, plus state taxes where applicable, though few companies pay that high after deductions and loopholes. The average corporate tax rate around the world is about 25 percent).
Ireland’s policy to attract new R&D firms, known as the “knowledge development box” (KDB), has disgruntled much of the European Union, the United States, and other developed nations. With KDB scheduled to take effect early next year, a number of critics have already come out against the new rate and its potential for abuse.
Medtronic holds one of largest operations in Ireland that originated in Minnesota. After its $49.9 billion purchase of Dublin-based Covidien this year that lead to its controversial “tax inversion” to become an Irish company, Medtronic now operates a more than 4,000-person team in Ireland’s capital city.
Alfred Marcus, a Carlson School professor and expert in corporate responsibility and business regulation, believes “the threat to the Twin Cities might be that Medtronic will move corporate R&D to take advantage of the low tax rates.” Loopholes may exist within the KDB policy, he says, that can bring about the transfer of intellectual property from its Minnesota operations to Ireland.
Robert Kudrle, professor of international trade and investment policy at the University of Minnesota, agrees, calling the tactic of international mobility “one of the biggest problems” in the field of corporate tax rate shopping. “What firms have tried to do in recent years is develop the germ of an idea in a place where they legitimately have the highest level of competence for R&D,” he says. “Then they shift the ownership and allow the benefits of the intellectual property to accrue to subsidiaries in areas with low corporate income tax [like Ireland], and that’s very difficult to control.”
Medronic’s overall tax rate is not expected to change, said Fernando Vivanco, senior director of corporate communications with the medical technology company. He added, “Medtronic has a long history operating in Ireland where we are one of the largest employers.” But when asked about the expansion of its R&D efforts in Ireland, Vivanco gave no comment.
“To simply say that Medtronic faces the incentive to do more R&D in Ireland now with the new legislation, that seems incontrovertible. It isn’t clear how much that will increase its activity there, but they at least have the incentive,” Kudrle said.
Marcus asserts that the bigger question to this issue deals with Ireland’s ability to produce competent staff for companies like Medtronic. “Tax rates are just one factor in corporate locations decisions,” he says. “If low taxes determined where companies located, then Silicon Valley would be in Mississippi and not California. Before Ireland can do anything serious, it must further build its scientific and technical infrastructure.”