Medical supplies group used Irish firm in tax deal
Covidien transferred right to $6.9bn loan to new entity
Multinational medical supplies group, Covidien, transferred the right to loans totalling $6.9 billion from Luxembourg to a new Irish company as part of an elaborate inter-group tax planning arrangement agreed with the Luxembourg tax authorities in 2009.
Under the deal, the Irish company would make payments back to Luxembourg. They would be considered to be dividend payments , and so would be exempt from tax under the terms of an EU directive on parents and subsidiaries, and Luxembourg law.
However the payments made by the Irish company would be considered interest payments from the point of view of Irish tax law, and so would be deductable against Irish corporation tax.
A request for a comment from Covidien met with no response.
Covidien is an Irish-registered plc multinational which employs about 1,500 people in operations in Athlone, Tullamore and Galway, as well as in Cherrywood, in south Dublin. Medical devices firm Medtronic is planning to buy Covidien in a controversial, multi-bilion euro inversion deal that would see Medtronic move its tax residency from the US to Ireland. Medtronic employs some 2,000 people in Galway.
The two companies involved in the Luxembourg loans plan were Covidien International Finance SA (CIFSA) and Covidien Finance Ireland Ltd. CIFSA is a Luxembourg company owned by an Irish Covidien company. Covidien Finance Ireland is a so-called section 110 company, a type of Irish special purpose vehicle that allows companies registered here to conduct certain financing arrangements in a tax neutral manner. Section 110 companies pay a corporation tax rate of 25 per cent on their profits.
Documents seen by this newspaper show that Alina Macovei of PwC in Luxembourg wrote to Marius Kohl of the Luxembourg tax authorities about the proposed transactions on November 25th, 2009, and referred to a meeting they’d had the previous month. She outlined the tax implications of the proposed transactions, as she saw them. Mr Kohl wrote back on the same day saying he believed her views were in compliance with the law and administrative practice. The correspondence refers to the proposed transactions as Project Kehoe and is an example of a so-called advanced tax agreement.
Covidien split from the former Tyco Group, a US multinational, in 2007, and moved up its headquarters from Bermuda to Ireland in 2009. Covidien plc has an address on Hatch Street, Dublin 2, as does Covidien Finance Ireland.
The PwC letter to Mr Kohl explained that Covidien plc was an Irish company that in turn owned Covidien Ltd, which was tax resident in Ireland and which owned all the shares in CIFSA. CIFSA is responsible for Covidien’s third-level borrowing, the proceeds of which are loaned on to other companies in the group. CIFSA is the owner of Covidien Finance Ireland Ltd, which was being set up for the purposes of the transactions being outlined in the letter.
CIFSA was to transfer the €6.9 billion loan receivable, meaning the right to the repayments due on group loans, to Covidien Finance Ireland, in exchange for a profit participation instrument (PPI). A PPI is a type of hybrid financial instrument, the use of which is among the issues being considered by the Organisation for Economic Cooperation and Development’s multinational taxation project, Base Erosion and Profit Shifting (Beps).
Ms Macovei said that as the PPI held by the Luxembourg company would be treated as equity, it would not count for the purposes of computing CIFSA’s net wealth for annual wealth tax purposes under Luxembourg law.
The accounts for CIFSA and Covidien Finance Ireland are not publicly available. The latest accounts for Covidien plc show it had a turnover of $10.2 billion in the year to the end of September 2013, and had pre-tax profits of $2 billion.
