Medtronic faces heat over IP tax haven transfer

Medtech moved more than $1 billion in income from its US operations to a Caribbean island | New twist in long-running transfer pricing dispute between company and the IRS over ‘arm's-length’ royalty owed under intercompany licences.

Medtronic has come under fire from the US government over its method for valuing an IP transfer to a Caribbean tax haven.

In a brief to the US Court of Appeals for the Eighth Circuit this week, the government urged the court to side with the US Internal Revenue Service (IRS) in saying that Medtech’s valuation method for the transfer is unreliable.

This is the latest development in a long-running transfer pricing dispute between Medtronic and the IRS over the arm's-length royalty owed under intercompany licences between Medtronic US and its Puerto Rican affiliate MPROC.

Medtronic moved more than $1 billion in income from its US operations to a subsidiary in Puerto Rico, between 2005 and 2006.

The IRS said that the transfer can’t be assessed by imagining a comparable transaction between two unrelated companies, because such transactions are too rare to reliably gauge, according to a report by Bloomberg.

Medtronic manufactures and sells implantable medical devices and the leads that connect the devices to the human body. It was these products that were licensed by Medtronic US to its subsidiary Medtronic Puerto Rico (MPROC), which it created in 2001.

MPROC paid a royalty of 29% of US net intercompany sales of devices, and 15% of net intercompany sales of leads, to Medtronic US.

What ensued was a tangled story of disputes between Medtronic and the US tax court, over both parties’ transfer pricing methods.

The case is Medtronic & Consolidated Subsidiaries v Commissioner of Internal Revenue, and was heard at the US Court of Appeals for the Eighth Circuit on April 15.

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