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.
U.S. Sen. Dick Durbin, D-IL
Media outlets including The Wall Street Journal, New York Times and Bloomberg all hung recent stories on an anonymous source when it came to Lake Forest, IL–based Hospira potentially paying $5 billion for Danone's medical nutrition business. The deal would amount to a “spinversion” that would allow Hospira to move its headquarters outside the U.S.
Nothing is official at this point. But U.S. Sen. Dick Durbin, D-IL, is still critical over the possibility that Hospira may no longer be headquartered in his state. Nearly 20% of the $4 billion-a-year company's business comes from infusion pumps and other medication management products.
“Your company’s injectable drugs and infusion technologies are purchased through taxpayer-supported programs, such as the Veterans Health Administration and Medicare, which have contributed to Hospira’s corporate success,” Durbin wrote in a letter to Hospira CEO F. Michael Ball. “If your company inverts, the tax dollars you are taking overseas will not be invested in the Veterans Health Administration to provide healthcare benefits to our veterans, basic research to support the development of new drugs, the transportation network that serves your company, or the federal system of patent protections,” Durbin said.
Ball declined to discuss the potential deal during a July 30 earnings call with analysts.
The news about Hospira comes at the same time that Medtronic is seeking to combat the blowback from its proposed $43 billion acquisition of Covidien, which would allow it to save money on taxes by moving its headquarters from Minnesota to Ireland.
Medtronic has paid $200,000 to lobbyists including former U.S. Sens. Trent Lott and John Breaux to handle issues in Congress over the deal—which has sparked controversy because it would allow Medtronic to save money on taxes by moving its headquarters to Ireland.
A lobbying disclosure report. specifically mentions the Stop Corporate Inversion Act of 2014 before the Senate Finance Committee as a target for the Breaux Lott Leadership Group—which includes Breaux, formerly a Democrat senator from Louisiana, and Lott, formerly a Republican senator and majority leader from Mississippi. Both former senators used to sit on the committee, according to Citizens for Responsibility and Ethics in Washington, which reported on the lobbying disclosure last week.
News of the additional lobbying comes around the same time that the Federal Trade Commission is asking for additional information and documentation around the Medtronic-Covidien deal. It is but another indication that President Obama clearly doesn’t like Medtronic’s plan to move its headquarters to Ireland through the purchase.
Medtronic’s $43 billion acquisition of Covidien would be the largest "tax inversion" deal yet.
The second request for information extends the FTC's waiting period on considering the deal by 30 days, according to a recent notice Medtronic filed with the U.S. Securities and Exchange Commission. The companies still expect the deal 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.
Medtronic CEO Omar Ishrak defended the Covidien purchase during a recent interview with CNBC: "What I do know is for us, the structure with Covidien was first and primarily driven by strategy from a healthcare perspective, in that together we could provide more value to the healthcare system and be a much more effective combination. And then once we determined that, then we assessed the most efficient structure through which we can operate more effectively as a company."
The Covidien acquisition would also allow Medtronic to expand its mission, company founder Earl Bakken said in a recently disclosed message. "We can serve more patients, in more ways, and in more places around the world than ever before. Instead of saying Medtronic improves a life 'every 3 seconds,' I expect that we’ll eventually be able to say 'every second.' Imagine that! And with Covidien sharing our 'patient first' focus, think of all the good we can do," Bakken said.
In a recent speech in Los Angeles, Obama said, without naming names, that companies looking to move their headquarters offshore for tax benefits are “technically renouncing their U.S. citizenship.” The Financial Times also quoted the President as saying: “My attitude is: I don't care if it's illegal. It's wrong... You don't get to pick the rate you pay.”
Democrats in both chambers of Congress agree and are supporting a law to limit such deals in the future. One bill, supported by U.S. Treasury Secretary Jacob Lew, would be retroactive to May of this year, potentially affecting the Medtronic–Covidien deal. Recently, four senators introduced a plan known as the "No Federal Contracts for Corporate Deserters Act," to make such deals less attractive. A number of Republicans also have expressed their disfavor for such tax deals but don’t agree with Democrats on how to address the issue.
The chances of Congress passing that legislation in the near future, however, are limited.
As a result, the Obama administration is considering options to go around Congress and do away with many of the tax-shielding incentives involving corporate inversion deals, which include Medtronic’s planned $43 billion acquisition of Covidien.
Enacting policies to thwart future inversion deals would help buy time as the administration plans on overhauling the U.S. tax system.
Any congressional or IRS action could give either Medtronic or Covidien the ability to step away from the deal, according to a New York Times report.
