Tax inversions Allow Companies to Avoid Minnesota State Taxes

Published On: 1st August 2014

From the internet

American companies that merge with their foreign competitors to reduce their federal taxes are also cutting their state taxes. This leaves the state sitting back, watching helplessly as their tax revenue floats away.

There has been a rash of companies buying their foreign competitors and then moving their parent companies to the foreign location. This is a tactic that is known as “tax inversion” and it is a tactic that has been seen in Minnesota.

The maneuver is one that has become rather popular among health care companies, such as Medtronic, putting pressure on other companies to do the same thing or be left at a competitive disadvantage.

In the Medtronic case, a well-known and highly successful Minneapolis medical device manufacturer, they agreed to buy their rival medical device maker in Ireland and move their headquarters there. Although the competitor is headquartered in Massachusetts, Medtronic is going to take the tax benefits of moving its headquarters overseas.

The U.S. corporate income tax rate is the highest in the world at 35 percent.

When a corporation inverts, it is easy to take income out of the United States and place it into a tax haven. The tax rules in the U.S. treat foreign income and U.S. income differently. This is why states lose revenue. The income is taken out of the U.S. federal tax base, so it is being taken out of the state tax base.

Minnesota has been known for quite some time as a state that is friendly to medical research companies. Its research and development credit is quite robust. Still, the firm is not blamed by many for wishing to maximize its profits through tax maneuvers that are perfectly legal.

Like most states that have a corporate income tax, Minnesota takes the federal corporate income tax and applies part of it to whatever sales the company has made in the state. The formula doesn’t really change based on tax inversion, but what changes is the federal number that is being multiplied against.

Medtronic states that the inversion was not for tax purposes, but for their ability to further their innovations and become more economically viable to the customers all around the world.

Although the headquarters will be moved out of the country, Minnesota officials are being optimistic with the fact that the company will continue to provide good paying jobs and pay local property taxes. Despite the transaction, no jobs will be lost in Minneapolis. The company has said that they are going to use some of their profits to invest in the United States.

Nonetheless, inversion is being seen as the newest wrinkle in tax avoidance by corporations, which has been happening in different ways for years. Because of this, Congress is considering broad tax reform measures that would close the gap on tax inversions. Some have asked for such a deal to be retroactive to May, which could threaten the Medtronic merger. Even Walgreens has stated that they are considering an inversion with a company in Switzerland, which some say could be problematic in a number of ways.