Medtronic to pay $63m tax penalty for Irish address

Medtronic plans to pick up a $25m tax bill for chief executive Omar Ishrak, the cost of a special penalty imposed by Congress on executives who shift their company’s tax domiciles out of the US.

The company is also paying a $38m tab for the rest of its top officers and directors, Minneapolis-based Medtronic said in a filing with US regulators. The tax penalty arises from Medtronic’s plan to adopt an Irish address as part of its takeover of Covidien Plc.

The requirement stems from a 2004 law meant to discourage CEO’s from lowering their companies’ tax bills by shifting their legal addresses out of the US. It imposes an excise tax, currently 15%, on the value of any restricted stock or unexercised options the executives hold at the time of the transaction. “It was clearly designed to be punitive,” said Paul McConnell, MD at Board Advisory, an executive compensation firm, pointing out companies regularly cover such costs for their executives. “It’s clearly a tax directed at these executives to prevent this from happening.”

Medtronic’s decision to cover the tax “is a rational response to an irrational law,” he said.

Compared with the value of the Covidien transaction to Medtronic shareholders, “the potential cost of the excise tax payment is relatively insignificant,” the company said in a filing under the name Medtronic Holdings Ltd. The contents were reported earlier yesterday by the Minneapolis Star-Tribune. Medtronic agreed to buy Covidien, a maker of hospital supplies, for $42.9bn in June.

The decision also covers Medtronic’s board members, raising the question of whether they would have pursued the deal if they had to bear the tax burden, said Brian Foley, a consultant in White Plains, New York, who helps companies set pay. “This was initially a deal in which the company can dodge its taxes, and now we’re allowing management to dodge the penalties,” he said. “They are being made whole with other people’s money, the shareholders’ money. They may be legal transactions, but that doesn’t make them right.”

Medtronic’s board made the decision to cover the executive’s costs, called a tax gross up, so they wouldn’t be personally penalised for an acquisition that’s in the company’s best interest, said Fernando Vivanco, a Medtronic spokesman. The decision to move the company’s address to Ireland is allowed under current U.S. law, he said in an e-mail.