The Twin Cities business community certainly took notice when Medtronic, a locally based business, announced that they were purchasing Covidien. Perhaps the most surprising aspect of this deal is that the merged company will relocate its headquarters to Ireland.
Reports from the Minneapolis Star Tribune indicate that many people immediately jumped to the conclusion that the change of address was an attempt at "tax inversion." In other words, by moving its home base overseas, Medtronic would be subject to a lower corporate tax rate. This sort of tax strategy has received public and government scrutiny when used by other businesses.
However, observers should probably take a closer look at what Medtronic is trying to do before jumping to conclusions about tax avoidance. The CEO of Medtronic noted that this business deal was about global business strategy, not a slick attempt to skirt federal taxes.
Medtronic has built a niche in developing complex medical devices. On the other hand, Covidien is known for making less sophisticated, yet important, devices. By expanding the breadth of products made available, Medtronic hopes to make more inroads with lower-cost medical providers.
Additionally, having a presence overseas will allow Medtronic to develop a more global brand. This way, the company will be better positioned to work with foreign governments and health care providers.
Due to all of the attention and speculation surrounding this deal, Medtronic could become the subject of scrutiny from Internal Revenue Service officials. The important thing to remember is that tax avoidance is different from tax evasion, a legal act. As such, it's important to demonstrate that a company is indeed adhering to the complexities of the federal tax code.
Source: Star Tribune, "Schafer: Global strategy, not taxes, drove Medtronic's merger with Covidien," Lee Schafer, July 5, 2014