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Walgreen Gives Up on 'Moving Overseas' to Cut Its Taxes

Earns Walgreen Co
AP/Steven Senne

Growing political heat and possible customer backlash helped dissuade Walgreen (WAG) from trying to trim its tax bill by reorganizing overseas as part of an acquisition.

But experts say they don't expect other companies considering the move to follow Walgreen's lead and stay rooted in the United States.

Walgreen, the nation's biggest drugstore chain, said Wednesday that it would no longer consider a so-called inversion, which has become popular among large, multinational health care companies looking to cut U.S. taxes. The company said it will instead combine with the Swiss health and beauty retailer Alliance Boots to form a holding company that's based in the U.S.

Walgreen Co. said in a statement that it was "mindful of the ongoing public reaction to a potential inversion" and its "unique role as an iconic American" retailer.

Walgreen's decision follows a wave of recently announced inversions that have prompted President Barack Obama and members of Congress to voice growing concern about tax revenue the U.S. government could lose from these moves. Despite Walgreen's decision, experts say U.S. companies will likely continue to pursue inversions because they can still reap big benefits by reorganizing overseas.

"We need fundamental corporate tax reform to solve this problem, and it isn't going to happen in an election year," said Donald Goldman, an Arizona State University professor.

Inversions involve a U.S. company reorganizing in another country by either acquiring or combining with another business. These deals provide tax relief in a number of ways. They allow companies to transfer money earned overseas to the parent company without paying additional U.S. taxes.

Inversions also provide some relief from the U.S. corporate income tax rate of 35 percent, which is the highest in the industrialized world. The U.S. had a competitive tax rate back in the 1980s but that changed when other countries started lowering their rates and the U.S. didn't follow, said Cynthia Eakin, an associate accounting professor at the University of the Pacific.

"We haven't paid attention to what's going on globally," she said. "We don't really have a global tax strategy."

There have been 47 U.S. companies that have put together inversions through tie-ups with foreign businesses over the past decade, according to the Congressional Research Service. Several others are planning or considering the move.

Walgreen was considering an inversion while it decided whether to buy the remaining portion of Alliance Boots that it didn't already own. In 2012, the U.S. company bought a 45 percent stake in Alliance Boots, which runs the largest drugstore chain in the United Kingdom.

It ultimately decided against an inversion because the company wasn't convinced the deal would pass IRS scrutiny. Walgreen didn't design the acquisition as an inversion, so it would have to change key elements of it, including possibly the terms, to avoid IRS challenges that it was abusing the tax code.

An IRS fight could have led to a long legal battle and back taxes with penalties if the company lost, Walgreen officials told analysts during a Wednesday morning conference call.

Plus, the company had no assurances that tax code wouldn't eventually be changed to remove some of the advantages companies get from inversions, spokesman Michael Polzin noted.

Additionally, Illinois Sen. Dick Durbin had sent a letter to Walgreen CEO Greg Wasson urging him to reconsider an inversion and warning that the company may find its customers are "deeply patriotic and will not support Walgreen's decision to turn its back on the United States."

Walgreen deals directly with consumers more than other companies -- like drugmakers -- that have tried inversions. So, Walgreen would be more sensitive to public reaction.

At the same time, companies face growing political pushback. The Obama administration has urged Congress to act swiftly to curtail inversions, and Democrats in both the House and Senate have introduced bills to rein in the practice. But the election year push is unlikely to succeed in a divided Congress, where Republicans favor more comprehensive tax reform.

Companies may pause their inversion plans to see how Congress reacts, tax lawyer Bret Wells said. But he said anything short of comprehensive tax reform won't stop them from then adjusting their plans and continuing to pursue inversions.

"As long as the financial benefits stay in place, companies are going to go after them," said Wells, an assistant law professor at the University of Houston.

Walgreen shares sank more than 14 percent, or $9.92, to $59.20 on Wednesday, after the drugstore chain announced its decision.

The company's stock had advanced more than 20 percent so far this year, as of Tuesday, and set several new all-time high prices. The most recent came on June 19, when the shares hit $76.39.

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A small omission in the article. US corporate tax rate is 35%, but the average corporate tax collected is 12.6%. Since '09 Wallgreen's made $3,714,700 in political contributions — 51.5% to Republicans, 43.9% to Democrats, and 4.57% to others. 73.63% was made at the state level and 26.37 at the Federal level. In the '09-'12 period, $1,867,900 went to republicans, $1,574,900 to democrats and $169,700 to others—51.7%, 43.6%, and 4.7% respectively. $2.8 million went to state contests and $891,900 to Federal contests. In the '13—'14 period there was a shift: 44.5% went republican, 55,5% democrat and none to othesr—all spending was at the Federal level. Strategically, it seems, they were buying favorable treatment until the recent backlash—they shifted there position to co-opt more democratic support at the federal level. It seems this has been less successful at gaining the desired support than the earlier thrust. Follow the money . . .find the truth. While everyone is blaming government and political parties, and some blame is deserved, it is about time to talk about corporate patriotism. The fact that congress might have set up "pay to play" is an issue, but it is equally reprehensible that the US corporations have chosen to fund the game.

August 07 2014 at 3:56 PM Report abuse +1 rate up rate down Reply

You and I pay the taxes on a corporation's product or service. The price they charge reflects the cost of taxes they are required to pay. Just another cost added to the mix. We pay it, they collect it and NOW they don't want to send it in ??? I suppose those corporation's that move overseas will reduce the selling price of their goods/services to us the end users as soon as they no longer have to pay that "unfair" US tax. Yeah, right......... People, taxes will always be collected to pay for government and all the infrastructure.Call it the blue tax or the red tax, collect it at the gas pump or the root beer stand ot whatever, but there will still be taxes for you and I to pay. A much better debate would be to have a full disclsure of the total $ collected and how efficiently it is spent. And who it is spent on...Welfare 250Billion,or sadly, Corporate Welfare, 1 TRILLION DOLLARS !!!

August 07 2014 at 12:27 PM Report abuse rate up rate down Reply

The government hands coporations a tax code that provides a blueprint/roadmap for how to lower its taxes and then whines that they might actually take advantage of the opportunity. The answer is to modify the code to remove incentives for doing the inversions. But, of course, that would involve some actual work by politicians and bueaucrats.

August 07 2014 at 10:55 AM Report abuse rate up rate down Reply

Any company that manufactures or has their headquarters anywhere but here should not be able to say that they are an American company.

August 07 2014 at 10:15 AM Report abuse +1 rate up rate down Reply

Stockholders must love this move because the stock fell like a lead balloon.
But hey its only other peoples money. If your so worried about companies going over seas because of taxation. Here is an idea lose the loupe holes and lower the tax rate.

August 07 2014 at 9:51 AM Report abuse -1 rate up rate down Reply

When a corporation moves their headquarters overseas to avoid paying American taxes I would no longer shop or do business with them. I would like to find the whole list of the corporations that have moved.

August 07 2014 at 9:34 AM Report abuse rate up rate down Reply
1 reply to toosmart4u's comment

Most are run by greedy Liberal Democrats.

August 07 2014 at 9:43 AM Report abuse -1 rate up rate down Reply

Piss on the greed stricken jews at walgreens, I wouldnt shop there anyway, thier prescription are higher than everyone else on the drugs , they are cons.
Happy and healthy my ass.

August 07 2014 at 9:24 AM Report abuse -4 rate up rate down Reply
1 reply to mikcl1's comment

Since no one else called this out, allow me. Keep your mindless bigotry to yourself.

August 07 2014 at 4:03 PM Report abuse +1 rate up rate down Reply

Liberal Democrats, screwing America for generations.

August 07 2014 at 9:11 AM Report abuse -3 rate up rate down Reply

Charlie Walgreen would be pleased. Those who wanted the inversion would have been fired by him on the spot.

August 07 2014 at 7:12 AM Report abuse +1 rate up rate down Reply

Sure, let's cut corporate taxes to European levels, like those in the Netherlands. Then we in the middle class will get screwed again. The pay a value added tax, which is like a national sales tax on both goods AND services of over 20%. Their income tax hovers around 50% for middle income learners. Once again we will be stuck with subsidizing corporate billionaires. Korrectionelecshun: your ignorant comments are so fitting of people like you...same old crap.

August 07 2014 at 1:49 AM Report abuse -1 rate up rate down Reply