In The Heart Of Minnesota
To: Omar Ishrak
710 Medtronic Parkway
Fridley, MN 55432-5604 (for now)
Dear Mr. Ishrak:
Millions of people worldwide have a special place in their hearts for Minnesota. That’s probably because millions of people worldwide have a physical piece of Minnesota in their heart—a Medtronic device. Until now, those devices started out in Minnesota, as did Medtronic. Medtronic was formed in a garage in northeast Minneapolis in 1949. The company has grown to the point where you can now announce that Medtronic will acquire Covidien, a maker of hospital and medical supplies, for $42.9 billion.
Irish eyes are smiling because Covidien, although run out of its headquarters in Mansfield, Massachusetts, is legally incorporated in Dublin, Ireland. That company is itself the result of a spinoff from Tyco, which originally sought to avoid United States taxation by reincorporating in Bermuda. And by the same token, much of the Medtronic-Covidien deal is being driven by tax strategies.
Dublin, Ireland, most famous for its Guinness brewery (actually located in Dublin), is now becoming famous for a new accountants’ brew, “tax inversion.” The basic way this works is that a United States company, trying to avoid corporate tax rates of 35 percent, reincorporates and establishes its “headquarters” in a tax-friendly jurisdiction such as Ireland (12.5 percent tax rate). United States tax law allows a corporation to keep profits it earns outside of the United States, but taxes those profits at the U.S. rate (35%) when they are returned or “repatriated” to the United States. Needless to say, there are a lot of profit expats living outside the United States.
In fact, approximately $2 trillion of expat dollars, according to Bloomberg, are currently heaped up at U.S. companies (through foreign subsidiaries) outside the United States, where they cannot be repatriated without paying a huge tax bill. Medtronic is not the only U.S. company to engage in this form of tax planning. Pentair, with offices in Golden Valley, has been headquartered in Switzerland following a 2012 merger deal. More recently, Pentair shareholders approved a plan to reincorporate Pentair in Ireland.
Business journalist Allan Sloan has reported that at least 28 United States companies in the Standard & Poor’s 500, including such high-profile companies as Sara Lee in Chicago, have shifted their headquarters from the United States to other countries since 2008.
So the Medtronic-Covidien deal is primarily a tax deal. Bill George, former Medtronic CEO, said as much in a New York Times interview. And Medtronic said as much in its SEC filing when it disclosed that, if Congress changes the law on these forms of tax schemes, the deal is off. Much political sound and fury—it is an even-numbered year—will be produced by this transaction. Should any of the rest of us care?
Tax experts have said that the idea that Medtronic will now become an Irish company is, to a large degree, an accounting fiction. And we should treat it as fiction. In exactly the same way as we treat, for example, 3M Corp. because it is incorporated in the state of Delaware. Corporations incorporate in Delaware not so much to avoid taxes as to avoid other legal and shareholder costs. And just as we have corporations located elsewhere but living among us, so, too, do we with many people in this state.
Medtronic is not the only entity domiciled elsewhere for tax reasons, yet moving and working among us. Many executives have followed that same course in their personal lives. Some of these part-time residents are called snowbirds. Others are called residents of Naples, Florida. The point is, many people in their personal lives routinely seek out a tax residence in a state with much lower taxes than in Minnesota. And this is not simply the case for individuals, but their heirs and their estate plans; many estate plans establish trusts in places like South Dakota or Delaware. So even the houses and personal possessions, to say nothing of bank accounts, that one may think are in Minnesota, in actual fact reside for estate tax purposes somewhere else. It was said during the last campaign that our governor receives money from a trust fund that resides in South Dakota.
People and corporations both establish complicated, and in many cases, “fictional” headquarters or domiciles entirely for the purpose of reducing taxes. It has always been that way and will always be that way.
Thousands of good-paying jobs in Minnesota will not suddenly leave Medtronic headquarters and magically reappear in Dublin, Ireland. And just as that magic will not occur, neither will the magic of a rational corporate tax law appear anytime soon. It is ridiculous to encourage companies to be successful and make money in markets outside the United States and then subject those earnings to extraordinarily high tax rates when the money is brought back into the United States to reinvest in those very companies. Most people in Washington understand that. A rational solution to that tax problem will emerge in an election year when leprechauns take over Capitol Hill.
This discussion of foreign tax domicile also obscures a more important point. The reason Medtronic is among us is because of our higher education system, our educated workforce and the entrepreneurship that exists in this state. Our tax and fiscal policies should be devoted to increasing those attributes. If, because we are very successful as a state and a people, some of our corporate enterprises purchase large companies in foreign countries, that is a cause for celebration.
So congratulations, Medtronic. You don’t have to go to Dublin to hoist a pint of Guinness.
Vance K. Opperman
A Fan of Medtronic
Vance K. Opperman (firstname.lastname@example.org) is owner and CEO of MSP Communications, which publishes Twin Cities Business.