Is the Broken U.S. Tax Code Hurting Minnesota?

Published On: 30th June 2014

From the internet

Medtronic has announced that it will be moving its headquarters to Ireland and many are saying this is a valuable lesson in how the broken U.S. tax code hurts workers by keeping good jobs from them purely for tax reasons.

Medtronic promised to invest over $10 billion in the U.S. and create at least 1,000 jobs in Minnesota alone after merging with a company in Dublin. Medtronic will be able to re-invest the money that it makes outside of the U.S. back into the country without having to make any additional tax payments, but only as long as the newly merged company is located in Ireland and not the U.S.

These investments could have already been made in the U.S. and the jobs could exist in Minnesota if the tax code wasn’t written in a way that American investments are punished, according to some upset by the fact a major company is leaving the U.S.

If Medtronic had used its previous earnings from abroad to finance new investments in the U.S. that create jobs, the corporate income tax in the U.S. on repatriated earnings would have made the investments cost-prohibitive.

Many observers have marked this as ironic because Medtronic engineered the deal with the Dublin company in order to move its headquarters. The new combined firm will be able to make new investments in America that will create jobs, but the money will be coming from around the world. These are job-making investments that Medtronic has not been able to make as an American company because the tax code keeps them from being able to without having to pay a cost they don’t want to pay.

Others state that it is unlikely that the promised new investment will be seen and that the 1,000 new jobs probably won’t be seen either. There is also a fact that a bill has been proposed that limits merged companies from moving their headquarters abroad. If that bill passes, the merger could be canceled.

American businesses are faced with a worldwide income tax system, while other countries in the industrialized world tend to use territorial taxation.

In the U.S., corporations pay corporate income tax in the foreign countries that they operate in. For instance, an American company has to pay 22 percent in Swedish corporate income tax on the Swedish income that it makes. When the American company brings the money back home, there is a 35 percent federal income tax rate that has to be paid, as well as state income taxes. They do receive a credit for the tax money that was paid abroad. This means that the American company faces an additional 13 percent of tax when they repatriate.

If a company in Canada operates in Sweden, it will pay its Swedish income tax on the Swedish income and then it can distribute its capital anywhere in the world without having to make additional payments. This shows how complicated worldwide taxation can be. It also shows that companies, such as Medtronic, consider taxes when they make major decisions about how to invest their money.