Medtronic 2015 Annual Report Download - page 39

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 Company expects a
ruling from the Tax Court during fiscal year 2017.
Examination and audits by tax authorities, and Covidien’s tax sharing agreement with Tyco International plc and TE
Connectivity Ltd., 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.
On June 29, 2007, Covidien entered into a tax sharing agreement with Tyco International plc (Tyco International) and TE
Connectivity Ltd. (TE Connectivity) pursuant to which Covidien, Tyco International and TE Connectivity agreed to share 42%,
27% and 31%, 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 Covidien’s 2007 separation from Tyco International (2007 separation). Under the tax
sharing agreement, Tyco International currently has the right to administer, control and settle all U.S. income tax audits for
periods prior to and including June 29, 2007. The timing, nature and amount of any settlement agreed to by Tyco International
may not be in our or Covidien’s best interests. The other parties to the tax sharing agreement can remove Tyco International as
the controlling party only under limited circumstances, including a change of control or bankruptcy of Tyco International, or by
a majority vote of the parties.
In connection with the 2007 separation, all tax liabilities associated with Covidien’s 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 with Tyco International and TE Connectivity.
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. Although Covidien shares certain tax liabilities with
Tyco International and TE Connectivity pursuant to the tax sharing agreement, if Tyco International and TE Connectivity
default on their obligations to Covidien under the tax sharing agreement, Covidien would be liable for the entire amount of these
liabilities.
Further, 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, Covidien could
be legally liable under applicable tax law for such liabilities and be required to make additional tax payments. Accordingly,
under certain circumstances, Covidien may be obligated to pay amounts in excess of the agreed upon share of Covidien’s, Tyco
International’s and TE Connectivity’s tax liabilities.
On September 28, 2012, Tyco International spun-off two of its businesses to its shareholders, with Tyco International remaining
as a publicly-traded company. This could have a material adverse impact on Tyco International’s ability to fulfill its obligations
to us under the tax sharing agreement.
In addition, the IRS has concluded its field examination of certain of Tyco International’s U.S. federal income tax returns for the
years 1997 through 2000 and proposed tax adjustments, several of which also affect Covidien’s income tax returns for years
after 2000. Tyco International has appealed certain of the tax adjustments proposed by the IRS and has resolved all but one of
the matters associated with the proposed tax adjustments. With respect to the outstanding issue that remains in dispute, on
June 20, 2013, Tyco International advised Covidien that it had received Notices of Deficiency from the IRS asserting that
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