IRS is after Medtronic again in Puerto Rico facility tax saga — 5 key notes

Spinal Tech

The Internal Revenue Services is arguing in federal court to increase Medtronic's taxable income by around $1.4 billion related to its factories in Puerto Rico, according to the Star Tribune


Here are five things to know:


1. The IRS alleges Medtronic failed to include the value of intangibles, including trade secrets, used by its Puerto Rico manufacturing subsidiary in 2005 and 2006 taxes. However, Medtronic maintains the company's accounting was accurate and that it overpaid the tax during that period.


2. Last year, Medtronic received a 144-page ruling from the U.S. Tax Court in their favor regarding the issue. However, the IRS appealed the decision to the Eighth U.S. Circuit Court of Appeals, claiming Medtronic shifted profits to Puerto Rico, a low tax jurisdiction, because the company's accountants allocate 60 percent of operating profits there, although the factories contributed to 11 percent of the manufacturing costs, according to the report.


3. The Tax Court ruled the Puerto Rico factories deserved a higher portion of the profits "because they played critical roles in design, quality control and risk management."


4. This controversy stems back several decades, but could have broad implications for the industry moving forward. Congress is considering amendments to current transfer pricing laws, which determine the amount of profit multinational companies can be taxed in low-tax countries, in the broader tax reform.


5. Tax experts are keeping an eye on the outcome of this decision, and some are surprised at the IRS' pursuit.


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