Medtronic 2016 Annual Report Download - page 126

Table of Contents
Medtronic plc
Notes to Consolidated Financial Statements (Continued)
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Participants in connection with this matter. The resolutions with the U.S. Tax Court and IRS Appeals were finalized during May
2016. Please see Note 18 regarding this subsequent event for additional information.
See Note 11 for additional discussion of income taxes.
Guarantees
As a result of the 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 the 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 percent, 27 percent, and 31 percent,
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 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.
In connection with the 2007 separation, all tax liabilities associated with Covidien business became Covidien’s tax liabilities.
Following Covidien’s spin-off of its Pharmaceuticals business to Covidien shareholders through a distribution of all the outstanding
ordinary shares of Mallinkrodt (2013 separation), Mallinckrodt became the primary obligor to the taxing authorities for the tax
liabilities attributable to its subsidiaries, a significant portion of which relate to periods prior to the 2007 separation. However,
Covidien remains the sole party subject to the Tax Sharing Agreement. Accordingly, Mallinckrodt does not share in Covidien’s
liability to Tyco International and TE Connectivity, nor in the receivable that Covidien has from Tyco International and TE
Connectivity.
If any party to the Tax Sharing Agreement were to default in its obligation to another party to pay its share of the distribution taxes
that arise as a result of no party’s fault, each non-defaulting party would be required to pay, equally with any other non-defaulting
party, the amounts in default. In addition, if another party to the Tax Sharing Agreement that is responsible for all or a portion of
an income tax liability were to default in its payment of such liability to a taxing authority, the Company could be legally liable
under applicable tax law for such liabilities and be required to make additional tax payments. Accordingly, under certain
circumstances, the Company may be obligated to pay amounts in excess of the Company’s agreed upon share of Covidien's, Tyco
International’s and TE Connectivity’s tax liabilities.
The Company has used available information to develop its best estimates for certain assets and liabilities related to periods prior
to the 2007 separation, including amounts subject to or impacted by the provisions of the Tax Sharing Agreement. The actual
amounts that the Company may be required to ultimately accrue or pay under the Tax Sharing Agreement, however, could vary
depending upon the outcome of the unresolved tax matters. Final determination of the balances will be made in subsequent periods,
primarily related to certain pre-2007 separation tax liabilities and tax years open for examination. These balances will also be
impacted by the filing of final or amended income tax returns in certain jurisdictions where those returns include a combination
of Tyco International, Covidien and/or TE Connectivity legal entities for periods prior to the 2007 separation. The resolutions with
the U.S. Tax Court and IRS Appeals were finalized during May 2016. Please see Note 18 regarding this subsequent event for
additional information.
In conjunction with the 2013 separation, Mallinckrodt assumed the tax liabilities that are attributable to its subsidiaries, and
Covidien indemnified Mallinckrodt to the extent that such tax liabilities arising from periods prior to 2013 exceed $200 million,
net of certain tax benefits realized. In addition, in connection with the 2013 separation, Covidien entered into certain other guarantee
commitments and indemnifications with Mallinckrodt.
Except as described above in this note or for certain income tax related matters, the Company has not recorded an expense related
to losses in connection with these matters because any potential loss is not currently probable or reasonably estimable under U.S.
GAAP. Additionally, the Company cannot reasonably estimate the range of loss, if any, that may result from these matters.
In the normal course of business, the Company and/or its affiliates periodically enter into agreements that require one or more of
them to indemnify customers or suppliers for specific risks, such as claims for injury or property damage arising out of the Company
or its affiliates’ products or the negligence of any of their personnel or claims alleging that any of their products infringe third-
party patents or other intellectual property. The Company’s maximum exposure under these indemnification provisions cannot be