(Bloomberg) Medtronic Inc., the globe-spanning medical device maker founded in a Minneapolis garage in 1949, is poised to become the biggest company yet to escape the U.S. tax system by shifting its incorporation abroad.

Medtronic said Sunday it plans to take a legal address in tax-friendly Ireland as part of a $42.9 billion takeover of Covidien Plc. Although Covidien is run from Mansfield, Massachusetts, it’s been incorporated in Ireland since 2009.

Minneapolis-based Medtronic joins some 44 American companies that have reincorporated abroad or struck plans to do so, including 14 in a recent wave of moves that began in 2012. Earlier this year, Pfizer Inc., the largest U.S. drugmaker, briefly proposed taking a U.K. address, a move that might have cut its tax bills by as much as $1 billion a year.

Such transactions have begun to snowball within parts of the health-care and oil industries as companies still without a foreign domicile try to catch up with those that have gone offshore. Shareholders are pressing drugstore chain Walgreen Co. to get a Swiss address. Without a change in law, a congressional panel estimated last month, future deals will cost the U.S. $19.5 billion in tax revenue over the next 10 years.

Medtronic has already cut its bill in recent years by accumulating $20.5 billion of untaxed earnings in offshore subsidiaries, said Robert Willens, an independent tax consultant based in New York. An Irish address would give it access to that money without paying the 35 percent U.S. corporate income tax on it, he said before the announcement.

$20.5 Billion
“They have one of the largest pools of unremitted earnings of any company,” Willens said. He added that Medtronic might also be able to put some of the $20.5 billion to use in the purchase price for Covidien without triggering a tax bill.

Medtronic’s plan is different from most of the other reincorporations, known as “inversions,” because it involves taking the Irish address of a company that isn’t run from Ireland. Covidien gets most of its sales from the U.S., where 19 of its 41 factories are located, according to a November securities filing. The foreign domicile came about when corporate predecessor Tyco International Ltd. carried out its own inversion to Bermuda in 1997. Covidien spun off as an independent Bermuda company a decade later, and switched to Ireland in 2009.

Medtronic Chief Executive Officer Omar Ishrak will continue to run the company from Minnesota, he said in an interview. Most of the U.S. companies that have inverted since 1982 also have kept their top executives at home.

Cash Access
“This is not about lowering tax rates,” Ishrak said in the interview, saying he expects little change. “What we will have is access to the cash generated outside the U.S. We’ll use that to invest much more aggressively in the U.S

Companies are so keen to escape the U.S. system because of the combination of a high tax rate—35 percent, the highest among developed nations—and the practice of taxing the earnings of U.S. companies’ foreign subsidiaries when the money is transferred back to the U.S. Many other nations, such as the United Kingdom, tax only domestic profits.

By establishing a parent company outside the U.S., firms can permanently avoid paying U.S. tax on foreign earnings. They can also realize more benefit from ‘‘profit shifting,” or transforming U.S. profits into foreign ones. Some popular methods involve transferring valuable patents to subsidiaries in tax havens or having an offshore entity lend money to U.S. units at exorbitant rates.

Tyco Case
Covidien and its former parent, Tyco, are still sparring with the Internal Revenue Service over the allocation of profits following the Bermuda inversion. The IRS said last year that Tyco saddled its U.S. units with phony debt, leading them to take improper interest deductions of $914 million between 1997 and 2000, Covidien said in a February filing. The IRS is seeking that amount plus $154 million in penalties, Covidien said. Tyco and Covidien contend the deductions were appropriate and are fighting the case in U.S. Tax Court.

If the IRS prevails, it probably will challenge some $6.6 billion of interest deductions taken by Tyco’s U.S. units in subsequent years, Covidien said in the filing. As a former division of Tyco, Covidien said it’s partly responsible for the company’s tax liabilities before 2007.

Medtronic’s $20.5 billion stockpile of untaxed offshore profits has led to its own dispute with the IRS. In 2010, the tax agency filed a notice demanding $958 million in additional taxes from the 2005 and 2006 audit years, claiming Medtronic inflated profits in a Puerto Rican subsidiary to reduce its U.S. bills. Medtronic is fighting the notice in Tax Court and last year said it had reached resolution on part of the case.

Defer Payments
While U.S.-based multinationals like Medtronic can’t permanently avoid taxes by allocating profits to lower-tax countries, the practice allows them to defer payment indefinitely. Congress could grant another temporary tax holiday, as it did in 2005, allowing them to repatriate the money at a lower one-time rate.

Big American companies have amassed more than $1.95 trillion in retained earnings offshore, according to data compiled by Bloomberg in March. Just 22 corporations account for more than half the total, led by General Electric Co. with $110 billion.

Ishrak, the Medtronic CEO, has been among those advocating another tax holiday. “That money can be used more effectively in the U.S.” Ishrak told Fox Business Network last year. “Let’s structure something that works for everybody.”

The offshore earnings help explain how Medtronic was able to lower its taxes so far below the U.S.’s statutory 35 percent rate, said Willens, the tax consultant. Medtronic had an average effective tax rate of about 18 percent between 2011 and 2013.

Tyco Shift
Tyco’s shift to Bermuda in 1997 helped kick off the first wave of corporate inversions that peaked during the late 1990s and early 2000s. Congressional leaders stopped the practice in 2002 by pledging to strip future deals of tax benefits through legislation. When the law was written in 2004, it contained several exceptions that made possible the current second wave.

Most importantly, companies can get an offshore address by buying a smaller foreign company, as long as the overseas firm’s shareholders end up owning at least 20 percent of the combined company. Most of the 20 inversions carried out since 2004 have involved takeovers of companies abroad that were big enough to meet the 20 percent test. Covidien investors will own about 30 percent of the merged company, Medtronic said yesterday.

Congressional Plans
After Pfizer announced plans to get a U.K. domicile in April, Senator Carl Levin, a Michigan Democrat, submitted a bill that would raise the 20 percent threshold to 50 percent, a level that would have prevented almost all of the recent merger-based inversions from generating a tax benefit, including Medtronic’s. In an attempt to discourage more companies from inverting before Congress acts, the bill would be retroactive to May 2014.

Republican leaders say that rather than targeting inversions themselves, Congress should remove the incentive to leave the U.S. by lowering the corporate tax rate and repealing taxes on foreign earnings. They advocate dealing with inversions as part of a broader revamp of the tax code, a revision that is unlikely to take place this year.

The Medtronic deal “establishes conclusively that people aren’t very concerned about the Levin bill,” said Willens, the tax consultant. “Everyone is very comfortable that this proposal will never see the light of day.”

—With assistance from Michelle Fay Cortez in Minneapolis and David Welch in New York.

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