Medtronic Pays $500 Million Tax Charge To Move $9.8 Billion To United States

By Jof Enriquez,
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Medtronic has announced that, as part of an internal restructuring related to its $49.9 billion merger with Covidien, it will pay a one-time tax charge of $500 million to be able to bring $9.8 billion in overseas cash to the United States. The tax-saving move is the result of the tax inversion deal that relocated Medtronic from Minnesota to Ireland, where corporate taxes are much lower. Medtronic could use the extra cash to fund more acquisitions.

The Wall Street Journal reports that Medtronic's U.S. tax payment only represents a 5 percent charge on the $9.8 billion cash and investments it is bringing back to the country. In contrast, Medtronic would have had to pay 35 percent income tax if it remained headquartered in Minnesota. That translates to approximately $3.4 billion in tax savings under Medtronic's new corporate structure.

Fernando Vivanco, a spokesperson for Medtronic, confirmed to the WSJ where the additional funding will be spent, saying, "We’re paying about $500 million in taxes to the U.S. Treasury to allow us to use these dollars in the U.S.”

A filing with the U.S. Securities and Exchange Commission (SEC) states that the company's restructuring of certain Covidien businesses "provides Medtronic with additional financial flexibility and increased confidence in the Company’s ability to meet its financial commitments, which include continuing to target an “A” credit profile through a reduction in its debt to EBITDA ratio by the end of fiscal year 2018, returning a minimum of 50 percent of its free cash flow to shareholders through dividends and share repurchases, and pursuing financially disciplined M&A."

In the months leading up to the eventual close of the merger, Omar Ishrak, CEO of Medtronic, fended off public criticism and regulatory scrutiny over the tax inversion deal to acquire Covidien, contending that it would give Medtronic much-needed flexibility to re-invest in the U.S. and create jobs there.

Ishrak had told analysts after the close of the merger with Covidien that the new company will look at U.S.-based companies with early-stage technologies to beef up Medtronic's product pipeline.

"So the M&A activity from us, certainly from a technology perspective, is very sort of close to what we’re focusing on. Bigger deals, obviously opportunistically, we’ll look at it, but that’s a matter of our overall financial bandwidth and our management bandwidth," he said during a conference call.

Now, with more cash on hand, Medtronic may become more aggressive in its M&A plans. Even before making the restructuring move to free up billions in cash, Medtronic has racked up smaller acquisitions worth at least $688 million since June, the Star Tribune reports. It recently completed a $100 million cash deal for Lazarus Effect, its eighth acquisition since the Covidien merger in January.