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Defenders of widespread corporate tax avoidance often say the real responsibility lies with Congress for allowing tax loopholes to exist. While partly true, corporate lobbying and political contributions are a significant reason why our corporate tax code is a mess. Some companies pursue tax avoidance schemes so aggressively that it’s clear the people running them lack even a minimal sense of responsibility to the country that makes their companies’ profits and their executives’ huge salaries possible. Medtronic is such a company.
Medical Device Tax
As Congress was debating health care reform at the start of Obama’s presidency, Medtronic had plenty of problems with scandals relating to some of its products and faced diminishing returns from its research. So its leaders decided to make a big deal out of a rather small tax item, the medical device tax, that lawmakers wanted to include in health reform law.
The principle behind the medical device tax was simple enough. All parts of the health care industry, including hospitals, pharmaceutical companies, health insurers, clinical laboratories and others, would benefit from expanded health care coverage provided by health insurance reform. Therefore, such companies should help pay for reform through various types of taxes and cuts in Medicare spending.
After Congress proposed the medical device tax, Medtronic and AdvaMed (the trade association for medical device companies) managed to persuade members to chop it in half before enacting the Affordable Care Act. Medtronic publicly celebrated this victory and lavished praise on lawmakers from both parties who made this happen.
But that wasn’t enough for Medtronic and AdvaMed, which have since demanded full repeal of the tax. The ensuing campaign has included claims by AdvaMed about its potential harmful impacts on the industry, claims that are easily disproven.
Medtronic’s leadership could have joined the honest medical device executives who stated publicly that the 2.3 percent excise tax is not going to hurt their business. As a report from the Center on Budget and Policy Priorities explains:
…Martin Rothenberg, head of a device manufacturer in upstate New York, calls claims that the tax would cause layoffs and outsourcing “nonsense.” The tax, he writes, will add little to the price of a new device that his firm is developing. “If our new device proves effective and we market it effectively, this small increase in cost will have zero effect on sales. It would surely not lead us to lay off employees or shift to overseas production.” Michael Boyle, founder of a Massachusetts firm that makes diagnostic equipment, insists that the device tax is “not a job killer. It would never stop a responsible manager from hiring people when it’s time to grow the business.”
Offshore Tax Havens
Recently, it has become increasingly clear that this is not the only tax that Medtronic has tried hard to avoid. “Offshore Shell Games,” the recent report from Citizens for Tax Justice and US PIRG Education Fund, found that Medtronic has disclosed 37 subsidiaries in countries that the Government Accountability Office has characterized as tax havens. (Companies may have subsidiaries that are not disclosed.) For example, Medtronic has five subsidiaries in the Cayman Islands and one in the British Virgin Islands.
Based on the data available, it’s impossible to know how much of the company’s profits are officially earned in these countries for tax purposes. But it’s clear that little if any of its profits are earned there in any real sense. In the aggregate, the profits that American corporations report to the IRS that they earn in Bermuda are 16 times the size of Bermuda’s economy, and the profits they report to earn in the British Virgin Islands are 11 times the size of that country’s economy. Obviously, corporations use a lot of accounting fictions when they claim to earn profits in these countries, and Medtronic is apparently one such company.
Demonstrating a lot of chutzpah even for a Fortune 500 corporation, Medtronic responded to questions about its offshore schemes by complaining that it would have to pay U.S. taxes on its tax-haven profits if it decided to officially bring them into the U.S.
This week, Medtronic’s leadership went even further to show its distain for the country that makes its profits possible. It announced that it would attempt a corporate “inversion,” which is a euphemism for the practice of American corporations pretending to be foreign companies to avoid U.S. taxes.
The tax laws in this area used to be so weak that American corporations could simply fill out some papers to reincorporate in a country like Bermuda and then declare themselves “foreign” corporations. This had huge benefits. As American corporations, their profits outside the U.S. could, at least in theory, be subject to some U.S. taxes if they were ever officially brought to the U.S. But as “foreign” corporations, their offshore profits would never be subject to U.S. taxes.
A bipartisan law enacted in 2004 tried to crack down on corporate inversions, but a loophole in the law makes it possible for an American corporation to invert if it acquires a relatively small foreign company. The resulting merged company can be considered a “foreign” company even if it is 80 percent owned by the people who owned the American corporation, and even if its business is still mostly conducted and managed in the U.S.
This is exactly what Medtronic aims to do with its bid to acquire Covidien, another device maker, and then reincorporate in Ireland. (Covidien itself is an inverted company, incorporated in Ireland but run out of Massachusetts.)
Medtronic’s CEO has ludicrously claimed that “this is not about lowering tax rates.” But this is entirely contradicted by the terms of the takeover agreement, which allow Medtronic to call off the deal if Congress changes the tax laws in a way that would treat the merged company as an American corporation for tax purposes.
In fact, legislation to curb inversions has been introduced. Congress should waste no time in enacting it. Otherwise, plenty of other corporations will feel pressure from their shareholders to invert if Medtronic gets away with pretending to be “foreign.”