Walgreens decides against reorganizing overseas

Walgreens, the nation's biggest drugstore chain, said on Wednesday that it would no longer consider trying to trim its tax bill by reorganizing overseas as part of an acquisition, likely a nod to growing political heat and possible customer backlash.

A so-called inversion has become popular among large, multinational health care companies looking to cut U.S. taxes, but the Deerfield, Illinois-based company said it would instead combine with the Swiss health and beauty retailer Alliance Boots to form a holding company that's based in the United States.

Walgreens 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.

Walgreens’ decision follows a wave of recently announced inversions that have prompted President Barack Obama and members of Congress to voice concern about the tax revenue that the U.S. 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 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.

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. Most of those have been initiated during the Obama presidency despite little changing in the corporate tax environment since the Bush administration.

Walgreens’ move comes as the Obama administration has urged Congress to act swiftly to curtail inversions. Democrats in both the House and Senate have introduced bills to rein in the practice. On Tuesday, the Treasury Department said it was “reviewing a broad range of authorities for possible administrative actions that could limit the ability of companies to engage in inversions, as well as approaches that could meaningfully reduce the tax benefits after inversions take place.”

In an interview with the New York Times on Tuesday, Treasury Secretary Jacob Lew said the following regarding the Obama administration’s consideration of executive measures to curb inversions: “The question is, 'Can we do enough that it will materially change the economics of inversions so that companies will make different decisions?'”

Walgreens 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 scrutiny by the Internal Revenue Service. 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 morning conference call.

Additionally, 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.

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 will not stop them from then adjusting their plans and continuing to pursue inversions.

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

Al Jazeera and The Associated Press