Medtronic (NYSE:MDT) could get a big hit if some Democrats in Congress are successful in their quest to pass a bill banning inverters from bidding for or winning federal contracts. Such companies have claimed as much as $1 billion in government dollars in the past 5 years.
Hoping to curb what is being deemed a corporate exodus of firms shifting their headquarters overseas to avoid taxes, Senators Dick Durbin (D-Illinois) and Carl Levin (D-Michigan) and Representatives Rosa DeLauro (D-Connecticut) and Lloyd Doggett (D-Texas) introduced the “No Federal Contracts for Corporate Deserters Act.”
In short, the bill would withhold federal contracts from firms that relocate their headquarters overseas to benefit from lower tax rates. Medtronic, which announced it is moving its Minnesota headquarters to Ireland late this year or early in 2015, could be affected since it just last year won a $58 million Department of Defense contract. According to MassDevice.com, Medtronic plans to use its $43 billion acquisition of Covidien (NYSE:COV) to relocate headquarters to Ireland in a “corporate inversion.”
There are already regulations on the books to restrict funds to inverters, but “just like with the tax code, corporations have begun to find loopholes in the contracting restriction,” according to a statement issued by Senator Levin.
Medtronic and Covidien have maintained that their merger is not motivated by the inversion, saying that the main drivers are strategic.
“Americans are rightly outraged at the wave of corporations seeking to abandon the U.S. to avoid their taxes,” Levin said. “We ought to put a stop to all inversions, but at the very least, we should stop these companies from receiving federal funding from the same American families who have to pick up the tax burden inverted companies shrug off.”
The White House has also sponsored measures to clamp down on offenders by prohibiting companies from changing their corporate tax domicile unless there is a change in control of the company itself. The proposal would take effect retroactively to early May 2014, meaning that it would impact the Medtronic-Covidien deal.
Nevertheless, the merger will allow Medtronic to tap the billions currently stored outside the U.S. without having to pay U.S. corporate taxes upon repatriation.
Covidien moved its headquarters to Ireland in 2009, saying at the time that the company hoped to benefit from the lower corporate tax rate there.