Excerpts from recent Minnesota editorials
Star Tribune, June 16
Medtronic’s new poster deal of U.S. tax reform
Under a much-discussed merger agreement, a notable medical-device manufacturer now based in Fridley will move its “executive” headquarters to Ireland, while top executives remain at “operational” headquarters in the Twin Cities. The Minnesota firm’s merger partner started doing business in Bermuda but is now incorporated on the Emerald Isle. Its operational base, though, is in Massachusetts.
A bit confused? Welcome to the wide world of “inversions,” where U.S. companies trying to escape one of the highest corporate tax rates in the world go abroad in search of reduced tax exposure through overseas mergers. The losers in this equation are the individual taxpayers and businesses that are left behind and facing a bigger share of the federal tax bill.
Do not read that last sentence as a full-throated indictment of Medtronic, the largest multinational U.S. company to go the inversion route in its planned $42.9 billion merger with Dublin-based Covidien PLC. Presuming the merger makes strategic sense and the price is right, publicly held Medtronic is doing exactly what it should do to maximize shareholder value.
The iconic Minnesota company currently has $14 billion in profits left abroad — so-called “trapped cash” — from its non-U.S. subsidiaries. The money is intentionally trapped, as Star Tribune business columnist Lee Schafer described in a column, because Medtronic and other responsible multinational companies try to keep their tax exposure as low as possible.
The firm could bring that money back to the United States, but such a repatriation would face the U.S. tax rate of 35 percent — minus the lower tax bill already paid overseas.
Instead, by merging with Covidien and becoming an Irish company in the eyes of the Internal Revenue Service, Medtronic would gain access to the new company’s expected $2 billion in annual cash flow and only pay Ireland’s 12.5 percent corporate tax on that money.
Medtronic, started in a Minneapolis garage in 1949 and deeply rooted in Minnesota, is going out of its way to emphasize that a strategic fit with Covidien — not taxes — is driving the merger.
No doubt in part to quiet inversion critics, CEO Omar Ishrak has pledged that after the deal, the company intends to invest $10 billion more than previously planned in the United States in the next decade. How? By using newly freed-up cash-flow from Ireland.
Ishrak, who plans to remain in the Twin Cities, also has promised that Medtronic intends to add 1,000 jobs in Minnesota over the next five years.
It’s worth noting that Medtronic traditionally has used every possible tax advantage available and that it now pays a global effective tax rate of 17.3 percent of pretax income, while it would save only a percentage point or two with the merger. The spread in several other inversion deals completed or contemplated in recent years has been much larger.
So what would the Medtronic-Covidien merger cost the United States in the long term? It’s unclear, but at the very least this country loses a Fortune 500 headquarters and any IRS claim on the new cash flow generated by the merged company.
There is little reason to doubt Ishrak’s promised $10 billion in additional investment, given that the United States remains the global leader in medical technology and innovation. Presuming he remains in the top job at Medtronic, he’ll also no doubt make good on his Minnesota job-growth pledge.
Meanwhile, other U.S. firms likely will look abroad in search of merger partners and lower tax rates. As the inversion exodus continues, of course, our representatives in Congress will turn up the volume on their bipartisan call for tax reform — likely without bipartisan agreement on what reform should look like.
The last U.S. tax overhaul took place in 1986, and in the meantime other countries — including Ireland — have succeeded in lowering corporate tax rates in ways that make them more competitive. In a global economy in which technology and international law allow multinational companies to look for the best possible haven, the United States is a high-tax outlier.
Minnesota Democratic U.S. Sens. Amy Klobuchar and Al Franken are co-sponsors of the STOP Corporate Inversions Act of 2014, which could effectively kill the Medtronic-Covidien deal. In the House, Republican U.S. Rep. Erik Paulsen has said the proposed merger is the result of a “broken tax code.”
A decade ago, Congress addressed the “trapped cash” problem with a special tax holiday on repatriated earnings. That one-time strategy could be used again, but it would do nothing to modernize the tax code or to reduce the level of uncertainty about the future. Instead, Congress should be focused on a revenue-neutral revamp of the tax code that would make the United States more competitive worldwide.
Given our current political environment, one could justify skepticism that significant legislation is on the horizon. In the meantime, raise a pint of Guinness to the only real clear winner in the latest inversion foray — Ireland.
The Journal of New Ulm, June 18
Gov. Mark Dayton may be the biggest Pollyanna in politics.
On June 14, the governor heard from the Chairman and CEO of Medtronic, Omar Ishrak, that the company was planning to spend $42.9 billion to acquire an Irish company that makes medical devices. In the merger, Medtronic will move its corporate headquarters from Minnesota to Ireland to take advantage of Ireland’s lower corporate taxes, and to access the billions in foreign profits it has stashed away.
The governor said this is great news, that he was assured that Medtronic plans to keep its operational headquarters in Minnesota, that no jobs would be lost due to the acquisition, and that Medtronic intends to create 1,000 new medical technology jobs in the next five years.
“That is tremendous news for Minnesota and evidences the company’s continued commitment to our state,” Gov. Dayton said.
But it’s also a sign that the corporate tax law in Minnesota and in the U.S. is flawed, driving companies to set up corporate headquarters in foreign countries to escape the higher tax rates in the U.S. and hindering further investment in this country.
By moving its corporate headquarters to Ireland, Medtronic will be able to take some of the $14 billion in foreign profits and use it in the U.S. without having to pay U.S. corporate taxes. Medtronic said it will be investing $10 billion in its U.S. operations over the next decade. Would it do so if remained a Minnesota based company that would have to pay taxes on those foreign profits at a 35 percent corporate tax rate? Or even the 17 percent rate that Medtronic pays thanks to its accountants? Probably not.
If this corporate shuffle is necessary to allow Medtronic to invest more and grow its operations in Minnesota, then this merger will benefit Minnesota. But the fact that Medtronic has to do so should be a signal to Congress that it is time to put partisanship aside and make some common sense changes to the tax code.
The Free Press of Mankato, June 18
The Afghan challenge has changed
Afghanistan held its presidential runoff election over the weekend, and, as was the case in the first round of balloting, the turnout was reportedly high (some 7 million votes cast) amid a relative lack of violence.
As Kevin Sieff of the Washington Post reported this week, the Taliban is not a viable threat to the Kabul government. It can make attacks, it can cause pain, but it cannot overthrow the government.
The most realistic threat to the Afghan government is ... the Afghan government.
Whoever is declared the winner when the vote count is announced next month, be it former Foreign Minister Abdullah Abdullah or former Finance Minister Ashraf Ghani, needs to clean up the corruption and incompetence of the outgoing administration of Hamid Karzai.
The West’s tendency is to view Afghanistan largely through the prism of our immediate concerns, which is terrorism. We went to war there because the Taliban provided shelter if not outright aid to al-Qaida as it planned and carried out the 9/11 attacks.
But the realistic issue there is domestic. It’s establishing a legitimate, competent government in a “nation” long resistant to such an entity.
The United States has spent considerable blood and treasure in Afghanistan and Iraq over the past 12-plus years. It will leave Afghanistan as it left Iraq: with a militant presence not entirely quashed, but sufficiently weakened that the new government should be able to cope with it.
That didn’t happen in Iraq. Nouri al-Maliki, the prime minister of Iraq, followed a policy of sectarian division. He alienated the Sunnis and created an environment in which the militants could regenerate. The crisis in Iraq today is political rather than military; al-Maliki failed to establish a government worth fighting for, and so his army didn’t fight as the militants captured city after city.
What happened in Iraq is indeed a cautionary tale in Afghanistan, but not for the United States. It’s a warning for the Afghans themselves. If the new government avoids the corruption of the outgoing one, if it puts its effort into building the economy and public institutions, if it regards its duties to be enhancing the lives of the citizens and not enriching the well-positioned, the Taliban will be increasingly irrelevant.