Growing political heat and possible customer backlash helped dissuade Walgreens from trying to trim its tax bill by reorganizing overseas as part of an acquisition.
But experts say they don’t expect that to stop other companies considering the move to stay rooted in the United States.
Walgreens, the nation’s biggest drugstore chain, said Wednesday 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 Illinois-based company said it will instead combine with the Swiss health and beauty retailer Alliance Boots to form a holding company based in the United States
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Walgreens 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.
Walgreens’ decision follows a wave of recently announced inversions that have prompted President Obama and Congress to voice growing concern about tax revenue the government could lose from these moves. Despite Walgreens’ 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 accounting 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, the highest in the industrialized world.
The U.S. had a competitive tax rate 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.
Walgreens was considering an inversion while it decided whether to buy the remaining portion of Alliance Boots that it didn’t own. In 2012, it had 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. Walgreens 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, Walgreens officials told analysts during a Wednesday conference call.
Plus, the company had no assurances the 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 Walgreens 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 Walgreens’ decision to turn its back on the United States.”
Walgreens deals directly with consumers more than other companies, like drugmakers, that have tried inversions. So, Walgreens 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 Congress 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 slow 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.
Walgreens shares sank more than 14 percent, or $9.92, to $59.20 on Wednesday, after the company announced its decision.
The stock had advanced more than 20 percent so far this year, as of Tuesday, and set several new all-time high prices.