Transfer Pricing Associates

Medtronic and the IRS Disagree on the Transfer Pricing Adjustments

post Monday September 17, 2012

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Following Medtronic Inc.’s Tax Court case, the Internal Revenue Service (IRS) has proposed transfer pricing adjustments related to the company’s 2007 sale of its acquired firm’s (Kyphon Inc.) U.S. assets to its wholly-owned subsidiary operating in Puerto Rico.

Medtronic Inc., based in suburban Minneapolis, Minnesota, is the world’s largest medical technology company. The company was targeted by IRS over its offshore profit shifting practice. Medtronic Inc. uses a so-called “transfer pricing” practice, whereby income is allocated among branches in different countries. It is a legal tax practice that U.S. companies regularly use to reduce their tax burden by shifting intellectual property abroad in order to avoid the relatively high corporate tax rate in the country, according to MarketWatch. Medtronic collected more than half of its $16 billion annual income from U.S. sales of devices made in Puerto Rico, and attributed a large proportion of that to a post office box in the Cayman Islands, according to MassDevice.

Medtronic has published the company’s Form 10-K for the fiscal year ended April 27, 2012. The report discloses that the disagreement with the IRS regarding to the proposed adjustment associated with the tax effects of the company’s acquisition of Kyphon Inc. remains unsolved. The IRS proposed that the acquired firm’s all U.S. goodwill, the value of the ongoing business, and the value of the workforce in place be included in the tangible asset sale. The company disagrees that those items were sold and with the IRS’s valuation of them. Medtronic is currently attempting to resolve the issues at IRS Appellate level and it stated its intention to proceed through litigation if necessary.

Sources: Medtronic, Bloomberg, Mass Device, Market Watch, Mass Device

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