Growing political heat and possible customer backlash helped dissuade Walgreen 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, multi-national 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.
Walgreen deals directly with consumers more than other companies — like drugmakers — that have tried inversions. So, Walgreen would be more sensitive to public reaction.