The merger of two medical companies often makes few headlines outside of the business section of the daily newspaper. The merger of medical device manufactures Medtronic and Covidien, however, is a different matter – not because of the devices they manufacture, but because of the spotlight the transaction has shined on the U.S.’s counter-productive and punitive tax code, which discourages American companies from reinvesting their global profits here at home.
America’s current corporate tax structure requires that companies pay the corporate tax rates in the countries where their profits are earned, plus the difference between the foreign rate and the U.S. rate if the company wishes to bring those profits back to the United States. For example a country with a corporate rate of 20 percent would tax a company making $1 million there exactly $200,000. However, because the current U.S. tax rate is 35 percent, repatriating those funds to the United States would require the company to pay the difference – an additional 15 percent, or $150,000 in this case. Given that massive difference, you don’t have to have a degree in corporate finance to see why many American companies often look abroad for opportunities to apply their profits rather than bringing the money home.
The upcoming merger between Medtronic and of Covidien is a crystal clear example of America’s punitive tax code discouraging U.S. investment. This deal allows Medtronic to take in $14 billion in cash held outside the U.S. and distribute it to shareholders at the Irish corporate tax rate of 12.5 percent. Moreover, the companies’ new main executive offices will be in Ireland to permanently take advantage of Ireland’s more friendly business climate. This move alone will save Medtronic $850 million per year by 2018 not to mention avoiding the medical device tax imposed by Obamacare. And Medtronic isn’t the only recent example of America’s perverse incentives in action.
Pharmaceutical giant Pfizer recently attempted to take over AstraZenca for the same reason.