(Reuters) – U.S. medical device maker Medtronic’s plan to buy rival Covidien and move its base to Ireland is a sign that something is wrong with the U.S. tax system, a top Obama administration official said on Tuesday.
The planned $42.9 billion acquisition is the latest so-called inversion deal to stir controversy in Washington. Under these transactions, a company buys a foreign firm and reincorporates in another country to take advantage of lower tax rates there.
Deputy Treasury Secretary Sarah Bloom Raskin said the Medtronic deal should put pressure on Congress and the administration to overhaul tax laws.
“This is a signal that some kind of business tax reform should be taken quite seriously,” she told a business forum. “Something is probably wrong with our tax system.”
The administration and many lawmakers support reducing the top U.S. corporate tax rate. But reform efforts in both the Republican-controlled House of Representatives and the Democrat-controlled Senate stalled this year amid deep disagreement over tax and spending priorities.
The U.S. Senate’s chief tax law writer on Tuesday vowed to work on overhauling the federal tax code by August 2015, citing a move by Medtronic Inc to shift its tax home base toIreland as a spur to congressional action.
Senator Ron Wyden, the chairman of the Senate FinanceCommittee, said he wants to cut the corporate income tax rate to 24 percent from 35 percent, chiefly by eliminating loopholes. Wyden has advocated this proposal for years. Multinational companies have been clamoring for a tax cut.
The Oregon Democrat said there will be an opening for tax reform between now and Congress’ August 2015 break. After that, lawmakers will be consumed by 2016 presidential election-campaign politics, he said.
“There is a prime 15-month window from now until the August recess of 2015,” he said at a Wall Street Journal conference.
“We do need to go after some of these loopholes,” Wyden said. “You go in there, clean those out, and use the money to hold down the rates.”
Wyden is one of the few lawmakers in the U.S. Congress to have a comprehensive plan for rewriting the tax code. He first offered it as legislation in 2010.
Congress has not thoroughly recrafted the loophole-riddled tax code since 1986. Some lawmakers have refocused on this daunting project because of a flurry of deals by major U.S. multinationals to move their tax domiciles offshore.
Medical device maker Medtronic Inc announced it has agreed to buy Dublin-based Covidien Plc for $42.9 billion. As part of the deal, known as an “inversion,” Medtronic would shift its tax home base to Ireland from Minnesota.
The transaction was the latest in a batch of proposed inversion deals. Two earlier ones, pursued by U.S. drugmaker Pfizer Inc and advertising company Omnicom Group Inc , failed for non-tax-related reasons.
Both deals, like Medtronic’s, would have resulted in smaller foreign rivals being acquired by major U.S. corporations so they could restructure and move their tax domiciles to countries with lower tax rates. The main attraction of this is to move foreign profits out from under the U.S. tax code, allowing a U.S. multinational to reduce its overall global tax burden.
The inversion strategy is rare, but is becoming more common. About half of the 50 or so deals done in the past 25 years have occurred just since the 2008-2009 financial crisis ended.