Medtronic 2015 Annual Report Download - page 43

Future potential changes to the U.S. tax laws could result in us being treated as a U.S. corporation for U.S. federal tax
purposes, and the IRS may not agree with the conclusion that we should be treated as a foreign corporation for U.S federal
income tax purposes.
Because we are an Irish incorporated entity, we would generally be classified as a foreign corporation under the general rule that
a corporation is considered tax resident in the jurisdiction of its organization or incorporation for U.S. federal income tax
purposes. Even so, the IRS may assert that we should be treated as a U.S. corporation (and, therefore, a U.S. tax resident) for
U.S. federal income tax purposes pursuant to Section 7874 of the U.S. Internal Revenue Code of 1986, as amended (the Code).
Under Section 7874 of the Code, if Medtronic Inc.’s shareholders immediately prior to the Transaction hold 80% or more of the
vote or value of our shares by reason of holding stock in Medtronic, Inc. immediately after the Transaction (the ownership test),
and our expanded affiliated group after the Transaction does not have substantial business activities in Ireland relative to its
worldwide activities (the substantial business activities test), we would be treated as a U.S. corporation for U.S. federal income
tax purposes. Based on the rules for determining share ownership under Section 7874 of the Code, Medtronic, Inc.’s
shareholders received approximately 70% of our ordinary shares (by both vote and value) by reason of holding stock in
Medtronic, Inc. Therefore, under current law, we should not be treated as a U.S. corporation for U.S. federal income tax
purposes. However, there is limited guidance regarding the application of Section 7874, including the application of the
ownership test.
In addition, changes to Section 7874 or the U.S. Treasury regulations promulgated thereunder could affect our status as a
foreign corporation for U.S. federal tax purposes. Any such changes could have prospective or retroactive application.
Since Section 7874 was enacted, there have been various legislative proposals to broaden its scope. Such proposals could,
among other things, treat a foreign acquiring corporation as a U.S. corporation under Section 7874 if the former shareholders of
the U.S. corporation own more than 50% of the shares of the foreign acquiring corporation after the transaction, or if the foreign
corporation’s affiliated group has substantial business activities in the U.S. and the foreign corporation is primarily managed
and controlled in the U.S. Accordingly, if enacted in their present form and retroactively effective to apply to the Transactions,
such proposals could cause us to be treated as a U.S. corporation for U.S. federal tax purposes.
If we were to be treated as a U.S. corporation for federal tax purposes, based on our existing expected cash flows, we could be
subject to substantially greater U.S. tax liability than currently contemplated as a non-U.S. corporation.
Specifically, if we were to be treated as a U.S. corporation for federal tax purposes, we would be subject to U.S. corporate
income tax on our worldwide income, and the income of our foreign subsidiaries would be subject to U.S. tax when repatriated
or when deemed recognized under the U.S. tax rules for controlled foreign corporations (CFC’s). Additionally, Covidien’s
foreign corporations, which are not currently CFC’s, would become CFC’s making them potentially subject to current or future
U.S. taxation, which could have a material adverse effect on our results of operations, financial condition, and cash flows.
The U.S. Treasury Department and the IRS may promulgate rules that would adversely affect our tax position.
The U.S. Treasury Department has announced that it is examining possible changes in the regulatory rules affecting companies
that move their tax domicile outside the U.S. In the event the U.S. Treasury Department and the IRS were to change the
applicable regulatory rules, we could face potentially substantial tax costs as a result of the Transactions. We are unable to
assess the potential impact of any such possible changes, if adopted, until they are announced.
On September 22, 2014, the U.S. Treasury Department and the IRS issued new guidance announcing their intention to issue
regulations interpreting multiple sections of the Code, including Section 7874, to address inversion transactions and transactions
that Treasury and the IRS characterize as “post-inversion tax avoidance transactions” (the IRS Notice). When issued, such
regulations would apply to transactions completed on or after September 22, 2014. The regulations described in the IRS Notice
would expand the set of circumstances under which Section 7874 applies to cause the foreign acquirer of a U.S. corporation to
be treated as a U.S. corporation for U.S. federal income tax purposes. Such regulations would also impose additional U.S. taxes
on certain transactions involving the acquired U.S. corporation’s CFC’s.
The regulations interpreting Section 7874 of the Code announced in the IRS Notice are not expected to cause us to be treated as
a U.S. corporation for U.S. federal tax purposes. However, if ultimately upheld by a reviewing court, the regulations announced
in the IRS Notice would be expected to limit our ability to engage in various intercompany transactions involving non-U.S.
subsidiaries.
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