New York Times Deal Book: In Deal to Cut Corporate Taxes, Shareholders Pay the Price, by Steven Davidoff Solomon (UC-Berkeley):
Medtronic is pursuing a deal to move abroad and save taxes. But few have noticed that the company’s shareholders will be the ones left with a big tax bill as a result. ...
The IRS will treat the acquisition as if Medtronic shareholders had sold their shares. Under IRS rules, when a company moves abroad in a tax inversion, the buyer’s shareholders must pay capital gains if they will hold 50 percent or more of the shares.
That is the case for Medtronic, and so its shareholders will be stuck with that big tax bill — up to 33 percent in California after you include the state tax. ... Let’s pause and reflect that Medtronic is pushing a transaction that from Day 1 may cost some of its shareholders as much as 33 cents on the dollar.
The sand in the eye for the shareholders is that Congress tried to halt the tide of inversions about a decade ago. Lawmakers amended the tax code to provide that executives of companies like Medtronic that went abroad would have to pay a tax on their stock compensation. The tax is at the same capital gains tax that Medtronic’s shareholders will have to pay in connection with the transaction.
But unlike its shareholders, Medtronic’s executives will be “grossed up” by the company. Medtronic will spend millions to pay the tax obligations of its executives in connection with the transaction. At least seven other companies undertaking inversions have indemnified their executives to the tune of tens of millions of dollars, according to Bloomberg News. But shareholders will receive nothing from Medtronic.
The gross-up highlights the absurdities of some Washington tax policies. Congress initially acted to halt inversions, but succeeded only in costing shareholders more as their companies just pay the tax for executives.
The real question is why shareholders at Medtronic and other companies haven’t protested. After all, Medtronic’s shareholders will get to vote on this deal. One reason may be that inversions do have benefits for shareholders. By lowering the company’s tax rate, its stock price will readjust to reflect these additional earnings.
Still, giving up a third of their value to endorse this transaction and reap benefits down the road seems like quite a sacrifice to ask of shareholders.