Medtronic U.S. Ops Could Soon Get $4.5-Billion Boost
By Jof Enriquez,
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Medtronic could repatriate up to $4.5 billion in cash within the next two years, after resolving an existing transfer pricing dispute with the U.S. Internal Revenue Service (IRS) years.
The Minnesota-based device maker disclosed in a recent SEC filing that it expects to “receive a one-time movement of cash from our OUS operations to our US operations of between $0.5B and $4.5B for tax years FY05 to FY14 (range is net of tax paid)” after it settles an ongoing dispute with the tax agency regarding its Puerto Rico operations.
Medtronic, which is merging with Irish medical device maker Covidien, said in the filing that the cash inflow is “independent from the transaction with Covidien, but is a component of Medtronic’s leverage-reduction plan.”
According to an article in Law360, Medtronic’s Puerto Rico unit manufactures components for its cardiac and neurological medical devices. The unit and the parent company have existing intellectual property licensing and supply agreements, the value of which were approved by IRS in the past via a memorandum of agreement, according to Medtronic. But Medtronic contends that the IRS commissioner later overvalued such deals, which drastically jacked up the company’s tax burden for 2005 to 2006.
“The commissioner now has determined vastly different values for the same intangible property that he has determined to have been 'transferred' from Medtronic US to Medtronic Puerto Rico over his various examinations of this issue, ranging from a value of $23 million when he first examined the issue as part of his 2002 examination to a value of $1.4 billion as part of his 2005-2006 examination and in this dispute — an amount more than 60 times greater than the commissioner's first determination,” said a memorandum by Medtronic cited by Law360. Moreover, Medtronic said that the commissioner also overcalculated royalty payments owed by its subsidiary.
The IRS wants Medtronic to pay an additional $198.2 million for 2005 and $759.4 million to cover the company’s tax liabilities, according to Law360. Medtronic went to court in 2011 to challenge the IRS order.
A recent report by the Taxpayers Against Fraud (TAF) Education Fund recalled that the IRS had absorbed consecutive setbacks in its litigation battle against Medtronic regarding the dispute. It noted that in August this year, “the US Tax Court denied the IRS’s motions to depose over a dozen former and current executives at Medtronic,” and that the Tax Court in October “rejected the IRS’s push for partial summary judgment in the case.”
The IRS is bolstering its campaign to go after medical device and pharmaceutical companies that are using questionable financial maneuvers to dodge taxes, according to TAF co-executive director Patrick Burns.
“Transfer pricing cases are one area where whistleblowers might provide the kind of insider information the IRS needs to recover billions of dollars,” Burns said in the TAF report. “Whistleblowers have helped the U.S. Department of Justice nail pharmacy and medical device providers for billions of dollars in the past, and our research shows many of the same companies engaged in Medicare and Medicaid fraud are involved in in tax fraud as well.” Burns added that Medtronic had paid over $150 million to settle whistleblower cases under the federal False Claims Act.