Medtronic 2016 Annual Report Download - page 31

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Medtronic, Inc. tax court proceeding outcome could have an adverse impact on our financial condition.
In March 2009, the IRS issued its audit report for Medtronic Inc.'s fiscal years 2005 and 2006. Medtronic, Inc. reached agreements
with the IRS on some, but not all matters related to these fiscal years. On December 23, 2010, the IRS issued a statutory notice
of deficiency with respect to the remaining issues. Medtronic, Inc. filed a petition with the U.S. Tax Court on March 21, 2011
objecting to the deficiency. During October and November 2012, Medtronic, Inc. reached a resolution with the IRS on various
matters, including the deductibility of a settlement payment. Medtronic, Inc. and the IRS agreed to hold one issue, the calculation
of amounts eligible for the one-time repatriation holiday, because such issue was being addressed by other taxpayers in litigation
with the IRS. The remaining unresolved issue relates to the allocation of income between Medtronic, Inc. and its wholly-owned
subsidiary operating in Puerto Rico, which is one of the Company's key manufacturing sites. The Tax Court proceeding with
respect to this issue began on February 3, 2015 and ended on March 12, 2015. The U.S. Tax Court issued its opinion on June 9,
2016. The U.S. Tax Court generally rejected the IRS’s position, but also made certain modifications to the Medtronic, Inc. tax
returns as filed. Final resolution of this matter is not expected until the end of calendar 2016 or later if the tax court opinion is
appealed.
Examination and audits by tax authorities could result in additional tax payments, which could have a material adverse effect
on our and Covidien’s business, results of operations, financial condition and cash flow.
The Company has provided reserves for potential payments of tax to various tax authorities related to uncertain tax positions.
However, the calculation of such tax liabilities involves the application of complex tax regulations in many jurisdictions. Therefore,
any dispute with a tax authority may result in a payment that is significantly different from current estimates. If payment of these
amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities generally would result in tax benefits
being recognized in the period when we determine the liabilities are no longer necessary. If the Company’s estimate of tax liabilities
proves to be less than the amount for which it is ultimately liable, we would incur additional charges to expense and such charges
could have a material adverse effect on our business, results of operations, financial condition and cash flows.
If the distribution of Mallinckrodt ordinary shares to Covidien shareholders in 2013, or certain internal transactions undertaken
in anticipation of the 2013 separation, are determined to be taxable for U.S. federal income tax purposes, we could incur
significant U.S. federal income tax liabilities.
Covidien received an IRS ruling substantially to the effect that, for U.S. federal income tax purposes, (i) certain transactions
effected in connection with its 2013 separation of Mallinckrodt qualify as transactions under Sections 355 and/or 368(a) of the
Code, and (ii) the distribution qualifies as a transaction under Sections 355 and 368(a)(1)(D) of the Code. In addition to obtaining
the IRS ruling, Covidien received a tax opinion from Skadden, Arps, Slate, Meagher & Flom LLP, in form and substance acceptable
to Covidien, which relied on the effectiveness of the IRS ruling, substantially to the effect that, for U.S. federal income tax purposes,
the distribution and certain transactions entered into in connection with the distribution qualify as transactions under Sections 355
and/or 368(a) of the Code.
The private letter rulings and the opinions relied on certain facts and assumptions, and certain representations and undertakings
in the case of the 2013 separation, from Covidien and Mallinckrodt, regarding the past and future conduct of their respective
businesses and other matters. Notwithstanding the private letter rulings and the tax opinions, the IRS could determine on audit
that the 2013 distribution or the related internal transactions should be treated as taxable transactions if it determines that any of
the respective facts, assumptions, representations or undertakings is not correct or has been violated, or that the distributions should
be taxable for other reasons, including as a result of significant changes in stock or asset ownership after the distributions, or if
the IRS were to disagree with the conclusions of the tax opinions that are not covered by the IRS rulings.
We could incur significant U.S. federal income tax liabilities or tax indemnification obligations, whether under applicable law or
the tax matters agreement that was entered into with Mallinckrodt, if it is ultimately determined that certain related transactions
undertaken in anticipation of the 2013 distribution are taxable.
Our tax position may be adversely affected by changes in tax law relating to multinational corporations.
Recent legislative proposals have aimed to expand the scope of U.S. corporate tax residence, limit the ability of foreign-owned
corporations to deduct interest expense, tax the accumulated unrepatriated earnings of foreign subsidiaries of U.S. corporations,
impose a minimum tax on the future offshore earnings of U.S. multinational groups, and to make other changes in the taxation of
multinational corporations.
Additionally, the U.S. Congress, government agencies in non-U.S. jurisdictions where we and our affiliates do business, and the
Organisation for Economic Co-operation and Development have recently focused on issues related to the taxation of multinational
corporations. One example is in the area of “base erosion and profit shifting,” where profits are claimed to be earned for tax
purposes in low-tax jurisdictions, or payments are made between affiliates from a jurisdiction with high tax rates to a jurisdiction
with lower tax rates. The Organisation for Economic Co-operation and Development has released several components of its