Medtronic Wins Tax Court Case Over IRS -- Update
June 09 2016 - 7:12PM
Dow Jones News
By Richard Rubin and Jeanne Whalen
The U.S. Tax Court handed Medtronic Plc a victory in a $1.4
billion dispute with the Internal Revenue Service over how much of
the medical device maker's profits should be taxed by Puerto Rico
and how much should face higher federal taxes instead.
In a 144-page ruling, Judge Kathleen Kerrigan agreed with the
company, saying it had proved the government's "allocations were
arbitrary, capricious, or unreasonable." The Puerto Rican
subsidiary, she wrote, "was involved in every aspect of the
manufacturing process" and thus was making significant
contributions to the overall company's profits.
The dispute dates back to the 2005 and 2006 tax years, before
Medtronic merged with Covidien PLC and moved its legal address to
Ireland.
Had the IRS won, it could have applied the same arguments to
every Medtronic tax return from 2007 forward, potentially pursuing
several billion dollars more in taxes.
The case involved transfer pricing, or the rules that govern
transactions between different arms of the same company.
Corporations must make such transactions as if they were engaged in
arm's length deals between unrelated companies, and allocate income
where it is earned, depending on which entity truly generates the
profits.
But those standards frequently lead to fact-intensive disputes
with the IRS. In this case, the company and the government were
arguing about the proper methods for determining how profits should
be split between foreign and domestic operations.
Although Puerto Rico is part of the U.S., companies based there
are considered foreign corporations for U.S. corporate income-tax
purposes. That means companies pay the local tax and don't have to
pay the full 35% U.S. tax rate until they repatriate the money.
Medtronic's Puerto Rican subsidiary manufactured medical
devices, and the company said it was attributing an appropriate
amount of the profits to its U.S. operations.
Judge Kerrigan, who was also critical of some parts of the
company's analysis, determined precise income allocations that were
different from what the IRS or Medtronic contended. Her findings,
however, were close to what Medtronic had initially proposed.
The exact amount Medtronic will owe hasn't been determined at
this stage of the case.
Medtronic said after the ruling that "our preliminary review
indicates that this decision appears to be favorable to Medtronic
on many key aspects of the case, and it appears to be generally
consistent with the company's most likely scenario for resolution
that has previously been communicated to investors."
"We will continue to assess the 144-page ruling and will provide
any additional guidance as required," the company said. "Final
resolution could take several months or longer if appealed."
The IRS didn't respond to a request for comment.
Write to Richard Rubin at richard.rubin@wsj.com and Jeanne
Whalen at jeanne.whalen@wsj.com
(END) Dow Jones Newswires
June 09, 2016 18:57 ET (22:57 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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