Medtronic may lose out under Obama’s new rules

Medtronic, the Minnesota-based medical device maker that's planning to take an Irish tax address, may become one of the biggest losers under rules announced by the Obama administration. Among the likely winners is Horizon Pharma, which just last week completed an address change, known as an inversion, from Illinois to low-tax Ireland.

The new Treasury Department rules announced yesterday capture companies like Medtronic that are still in the process of switching nationalities and spare those that have already finished their transactions.

Medtronic’s plan to become Irish, announced in June, was part of a wave of such deals that focused attention in Washington on the growing tax avoidance trend and caused Treasury Secretary Jacob J. Lew to reverse himself. After saying in July that Treasury lacked the authority to stop the deals, he started work on new regulations in August to limit the tax savings they generate. Congress is deadlocked over a legislative response. The rules end a period of uncertainty for companies considering such deals, said Steven Rosenthal, a senior fellow at the Urban Institute in Washington and a former corporate lawyer. “Once you clarify the rules, you allow companies to quantify their benefits more cleanly,” he said.

Hopscotch rule

Medtronic and drugmaker AbbVie, among the eight US companies planning inversions, have large amounts of foreign earnings held in cash; the Treasury rules would restrict inverted companies' access to those funds. Other inverting companies, including Burger King Worldwide in Miami, Florida, and drugmaker Mylan in Canonsburg, Pennsylvania, don't have as much offshore cash.

Medtronic dropped 3.7 per cent to $63.54 at 8 am New York time in trading before US exchanges opened.

Covidien, the medical-supplies company that Medtronic has agreed to buy, fell 2.9 per cent to $87.80. AbbVie slumped 4.6 per cent to $55.99 and Shire Plc, the UK drugmaker it's buying, sank 6 per cent to 49.18 pounds in London. Burger King and Mylan also declined.

Companies are still studying how the 42-page rules would affect them. Each inversion is unique, arranged by teams of lawyers and accountants using layers of corporate entities.

Economic sense

In announcing the rules, Lew said that “for some companies considering deals, today’s action will mean that inversions will no longer make economic sense.”

Medtronic is getting an Irish address through a takeover of Covidien, which is incorporated in Ireland and run from Massachusetts. Part of the new rules would restrict inverted companies from taking loans from their foreign subsidiaries without paying US taxes. Because the loans allow the company’s cash to skip past the former U. parent company, they’re known as hopscotch loans.

In announcing the Covidien deal in June, Medtronic chief executive officer Omar Ishrak said it would give the company easier access to foreign earnings and allow Medtronic to boost US research spending by $10 billion over the next decade.

Medtronic has about $13.9 billion in cash and equivalents outside the US, the most among the eight companies with pending inversion deals. It plans to lend some of that money to its new Irish parent as part of the transaction, potentially exposing it to the anti-hopscotch rule.

Medtronic’s review

“We are studying Treasury’s actions,” Medtronic said in a statement. “We will release our perspective on any potential impact on our pending acquisition of Covidien following our complete review.”

Another company with a pending inversion, North Chicago, Illinois-based AbbVie, says a “significant portion” of its $10.3 billion in cash and equivalents is in foreign subsidiaries. Mylan has $174 million in foreign cash; Burger King doesn’t break out how much, if any, of its $499 million in foreign earnings are in the form of cash or equivalents.

Another new rule may directly affect Mylan's inversion, according to a research note from Liav Abraham, an analyst at Citigroup Inc. The rule prevents companies from inverting part of themselves by spinning off a division as a foreign company. According to Abraham, that rule probably applies to the Mylan transaction, in which the drugmaker plans to become Dutch by acquiring a European unit of Abbott Park, Illinois-based Abbott Laboratories. Horizon Pharma Spokesmen for AbbVie, Mylan and Burger King declined to comment or didn't respond to after-hours calls and e-mails.

On September 19th, Horizon Pharma, a maker of treatments for arthritis pain based in Deerfield, Illinois, completed its transformation into an Irish company.

Like Medtronic and most of the other inverting companies, Horizon is keeping its top executives in the US. Because the new Treasury rules took effect yesterday, none of them would apply to Horizon.

Robert Carey, the company’s chief business officer, said in an interview last week that most of the company’s larger peers in the specialty pharmaceuticals business have completed inversions to escape the US tax net -- he’s just catching up. “As we move forward,” he said then, “we’re on a level playing field with all the other parties.”

Bloomberg