Walgreens today scrapped a controversial plan to relocate its headquarters to Europe to avoid paying billions in U.S. taxes over the next five years.
The Deerfield, Illinois-based drugstore company, which was considering relabeling itself as Swiss or British in conjunction with its acquisition of Switzerland's Alliance Boots, has outraged lawmakers and Main Street over its proposed tax dodge. The tactic, which is perfectly legal, is known as a "corporate inversion," and has become popular in the past few years, primarily among U.S. pharmaceutical giants. By technically moving a headquarters to a tax-friendly address outside the U.S. via a merger or acquisition, companies can wiggle out of paying taxes on profits earned overseas — which in this case, would impact earnings from Boots.
Inversions also make it cheaper for companies to bring cash back into the U.S. — once they're "foreign," they evade taxes on using offshore cash hoards to fund U.S. investments, according to a column in the Wall Street Journal. Such maneuvers can help companies "goose their stock prices through dividends and buybacks funded by low-taxed foreign cash," writes Edward Kleinbard, a law professor at the University of Southern California. So why not head to Ireland, the Netherlands, the U.K. or Switzerland?
"It obviously saves people a lot of tax payments, right?" Rick Hans, divisional vice president of investor relations and finance at Walgreens, said of inversions in April. "We've never been a proponent to pay more taxes than we have to. We try to optimize that. It creates value, yes."
If it sounds kind of shady, it is. President Obama said in a CNBC interview last month that if "you're simply changing your mailing address in order to avoid paying taxes then you're really not doing right by the country and by the American people." Jon Stewart described corporate inversions on The Daily Show this week as "multibillion dollar corporations attempting to maximize profit through globalized tax evasion."
"People are paid to maximize profits," Obama told CNBC. "But people are also paid to be good corporate citizens...and this kind of strategy, I think undermines people's confidence in how companies are thinking about their responsibilities to the country as a whole."
The tax dodge isn't worth it, Walgreens says
"Imagine that you woke up one day and read a headline that some of our wealthiest citizens were giving up their U.S. citizenship and declaring themselves citizens of Guernsey (or some other tax haven), which would cut their tax bill by two-thirds,"
hedge fund manager Whitney Tilson wrote in a July 20 e-mail he distributes to clients, friends and reporters. "But they weren't actually moving to Guernsey – in fact, absolutely nothing was changing: they still carried U.S. passports, sent their kids to U.S. schools, drove on U.S. roads, benefitted from the U.S. systems of laws and courts, not to mention the protections afforded by our police and U.S. military, went to work and/or operated their businesses in the U.S., etc. And all of this was 100% legal, thanks to a huge loophole in the U.S. tax code."
Corporations, of course, are incentivized to be ruthless in their pursuit of "value creation" for shareholders, and so it's no surprise that Walgreens sought to exploit this loophole. Some estimate the move could have saved the company $4 billion over the next five years, according to a group called Americans For Tax Fairness. And proponents of corporate inversions claim that it's only happening because American companies have been placed at a big disadvantage, tax-wise, against their foreign competitors. Companies often complain that the U.S. has the highest corporate tax rate in the industrialized world, of 35%.
But Walgreens said today that it couldn't reach an agreement on how to restructure its transaction with Alliance Boots to pursue an inversion. It also cited "potential consumer backlash and political ramifications" as reasons for forgoing the plan. The company will buy the 55% of Alliance Boots it doesn't already own for $5.27 billion plus stock, with a global headquarters in the Chicago area, it said today.
While Congress has been unable to devise a way to deter companies from pursuing corporate inversions, the Treasury Department said Tuesday it's looking into ways to limit the maneuvers without Congress's support, according to the Journal. That might provide a "partial fix" until a comprehensive solution is provided by Congress, a spokeswoman told the newspaper.
"The question is, Can we do enough that it will materially change the economics of inversions so that companies will make different decisions?" Treasury Secretary Jacob Lew told the New York Times. "The things we are looking at look to me like they could very materially change the economics of inversions," he said.