Medtronic 2015 Annual Report Download - page 137

Medtronic plc
Notes to Consolidated Financial Statements (Continued)
relate to the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico, and
proposed adjustments associated with the tax effects of its acquisition structures for Ardian, CoreValve, Inc., and Ablation
Frontiers, Inc. The Company disagrees with the IRS and will attempt to resolve these matters at the IRS Appellate level,
however, it will proceed through litigation, if necessary. The IRS continues to audit Medtronic, Inc.’s U.S. federal income tax
returns for the fiscal years 2012 through 2014.
Covidien and the IRS have concluded and reached agreement on its audit of Covidien’s U.S. federal income tax returns for the
2008 and 2009 tax years. The IRS continues to audit Covidien’s U.S. federal income tax returns for the years 2010 through
2012. Open periods for examination also include certain periods during which Covidien was a subsidiary of Tyco International.
The resolution of these matters is subject to the conditions set forth in the Tyco tax sharing agreement. Tyco International has
the right to administer, control and settle all U.S. income tax audits for periods prior to the 2007 separation.
The IRS has concluded its field examination of certain of Tyco International’s U.S. federal income tax returns for the years
1997 through 2000 and proposed tax adjustments, several of which also affect Covidien’s income tax returns for certain years
after 2000. Tyco International has appealed certain of the tax adjustments proposed by the IRS and has resolved all but one of
the matters associated with the proposed tax adjustments. With respect to the outstanding issue that remains in dispute, on
June 20, 2013, Tyco International advised Covidien that it had received Notices of Deficiency from the IRS asserting that
several of Tyco International’s former U.S. subsidiaries owe additional taxes of $914 million plus penalties of $154 million
based on audits of the 1997 through 2000 tax years of Tyco International and its subsidiaries as they existed at that time. These
amounts exclude interest and do not reflect the impact on subsequent periods if the IRS position is ultimately proved correct.
The IRS has asserted in the Notices of Deficiency that substantially all of Tyco International’s intercompany debt originating
during the years 1997 through 2000 should not be treated as debt for U.S. federal income tax purposes, and has disallowed
interest deductions related to the intercompany debt and certain tax attribute adjustments recognized on Tyco International’s
U.S. income tax returns totaling approximately $3.0 billion. The Company disagrees with the IRS’s proposed adjustments. On
July 22, 2013, Tyco International filed a petition with the U.S. Tax Court contesting the IRS assessment. The Company believes
there are meritorious defenses for the tax filings in question, that the IRS positions with regard to these matters are inconsistent
with the applicable tax laws and existing Treasury regulations, and that the previously reported taxes for the years in question
are appropriate.
No payments with respect to these matters or any additional matters that may be raised by the U.S. Tax Court would be required
until the dispute is definitively resolved, which could take several years. The timing and outcome of such litigation is highly
uncertain and could have a material adverse effect on the Company’s consolidated financial statements. In particular, if the IRS
is successful in asserting its claim, it would likely assert that approximately $6.6 billion of interest deductions with respect to
Tyco International’s intercompany debt in subsequent time periods should also be disallowed.
Covidien’s income tax returns for the years 2001 through 2003 remain subject to adjustment by the IRS upon ultimate
resolution of the disputed issue involving certain intercompany loans that originated during 1997 through 2000. Covidien and
the IRS have effectively settled its audits of tax matters for the years 2004 through 2007.
See Note 12 for additional discussion of income taxes.
Guarantees
As a result of the recent acquisition of Covidien, the Company has guarantee commitments and indemnifications with Tyco
International, TE Connectivity, and Mallinckrodt plc (Mallinckrodt) which relate to certain contingent tax liabilities.
On June 29, 2007, Covidien entered into a tax sharing agreement, under which Covidien shares responsibility for certain of its,
Tyco International’s and TE Connectivity’s income tax liabilities for periods prior to Covidien’s 2007 separation from Tyco
International (2007 separation). Covidien, Tyco International and TE Connectivity share 42%, 27%, and 31%, respectively, of
U.S. income tax liabilities that arise from adjustments made by tax authorities to Covidien’s, Tyco International’s and TE
Connectivity’s U.S. income tax returns, certain income tax liabilities arising from adjustments made by tax authorities to
intercompany transactions or similar adjustments, and certain taxes attributable to internal transactions undertaken in
anticipation of the 2007 separation. If Tyco International and TE Connectivity default on their obligations to Covidien under the
Tyco tax sharing agreement, the Company would be liable for the entire amount of these liabilities. All costs and expenses
associated with the management of these tax liabilities are being shared equally among the parties.
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