Tuesday, July 29, 2014

Noise and Nonsense Over Walgreens’ Inversion Plans

Since I published March’s Inversion Uncertainty: Is Alliance Boots Really Acquiring Walgreens?, Walgreens has become embroiled in a giant PR nightmare over its plans. Major politicians are attacking the company. Editorials are calling the company “unpatriotic.” A potent anti-Walgreens consumer movement is starting to spread online. Examples below.

The attacks are very misinformed. If Walgreens moves its headquarters to Switzerland, it will continue paying U.S. taxes on its U.S. operations. Walgreens will only avoid U.S. taxes on its substantial, soon-to-be-acquired non-U.S operations. That's one reason why inversion is still the most likely outcome. See if you agree with my scenario below.

Walgreens' management neglected to get in front of this story, so politicians and anti-Walgreens activists are leading the narrative. Has the company again misjudged a controversy (a la the 2012 Express Scripts debacle) and handed an easy victory to its pharmacy competitors?


As a reminder, tax inversion is a wonky-sounding term to describe a company’s moving its headquarters from a high-tax nation to a low-tax nation.

Here’s a small sample of the anti-inversion vitriol:
Walgreens finds itself embroiled in this story, because an inversion could relocate the post-2015 Walgreen-Alliance Boots organization from the U.S. to Switzerland. See Yes, Walgreens is Seriously Considering Inversion.

Change to Win, a group that slings mud at any company that doesn’t go along with its union organizing efforts, helped focus the spotlight on Walgreens by publishing a report titled Offshoring America’s Drugstore. (You can learn everything you need to know about Change to Win’s tactics from their website Walgreens Gone Wrong.)

U.S. Senator Dick Durbin (D-IL), who represents Walgreens’ (current) home state, ranted directly to CEO Greg Wasson in an oh-so-subtle missive entitled Renouncing Your American Corporate Citizenship Hard To Defend. He wrote:
Customers have many choices about where to shop and where to have their prescriptions filled. I believe you will find that your customers are deeply patriotic and will not support Walgreen’s decision to turn its back on the United States…Is ‘the corner of happy and healthy’ somewhere in the Swiss Alps.

Last week, Senate Majority Leader Harry Reid (D-NV) piled on, saying:
The company that Charles Walgreen started is reportedly considering a renunciation of its American citizenship and a move to Switzerland, just to avoid paying its fair share of taxes. This practice, what some call ‘inversion,’ is a tax trick — a loophole.” (source
Even The USA Today weighed in with the pejoratively-titled article Walgreens eyes loophole end run around taxes, which contained this zinger:
But here in this town of 16,000 where just about everybody can tell you about company founder Charles Walgreen's impact on the community, such a move seems out of step with how the Walgreen family conducted business.
"I think he'd be rolling in his grave if he knew what was going on today," says Bill Jones, who runs the Northwest Territory Historic Center in Dixon and worked closely with the Walgreen family on building an exhibit at the museum honoring the founder.
Ok, that's gotta hurt. The USA Today also raises the spectre of consumers "trading Walgreens for CVS."


I’m not normally in the position of defending Walgreens. However, the company is being unfairly attacked by people who don't seem to understand tax inversions.

Consider this scenario: A made-in-China No. 7 skin cream that is sold to a British citizen by a Boots pharmacy located in London.

Should the U.S. get to tax the profits of this transaction? I don’t think so.

But that's what will happen after Walgreens acquires the second part of Alliance Boots. Inversion solves the problem, by moving Walgreen’s headquarters to the more tax-enlightened Switzerland.

Note that Walgreens will continue to pay taxes on its US operations after an inversion. A Forbes contributor sets the record straight in Repeat After Me; Tax Inversions Do Not Eliminate Federal Or State Taxes On US Profits:
The taxation of those profits that Walgreen’s makes by doing business in the US doesn’t change. The company as a whole may not be domiciled in the US but their business in the US is still a permanent establishment and is still resident in the US for tax purposes. That $74 billion of revenue largely coming from Medicaid and Medicare is still all happening in the US and the profits made from that will still be taxed in the US at the same and regular US corporate income tax rate.
What does change is that Walgreen’s profits made outside the US have moved from being US domiciled to being non-US domiciled. And as those outside the US profits are neither US resident nor US domiciled then they’re not taxable in the US.
I highly recommend Ignoring the Facts on Corporate Inversions, a Wall Street Journal editorial by Miles White, Chairman and CEO of Abbott Laboratories. Mr. White correctly notes:
Inversions are legal. Not abuse. Not cheating. To those spouting the histrionic rhetoric in opposition to inversion, I would suggest that some consideration of the facts would better inform your judgment, which might be more productively directed at how to make the U.S. and U.S. companies more globally competitive, including thoughtful and balanced reform of the tax code.

Those of you following the @DrugChannels twitter feed may have noticed my sign-off for tweeted articles about inversions:

Hate the game, not the playa #taxreform

Translation: Don't blame Walgreens for acting sensibly within a broken system. Unfortunately, it's much easier to rant ignorantly about "economic patriotism" than to meaningfully update the U.S. tax code.

Sometime in the next few weeks, Walgreens management plans to update investors on its plans. Stay tuned for a bumpy August.


  1. Jacob Law... You learn something new everyday.

  2. While the spirit of what you say is completely correct, the analysis ignores what typically happens post inversion which is earnings stripping. This can be done via intercompany loans, shifting of IP etc. This typically will lead to much lower taxes on US based business as well. It appears as if that is likely part of the WAG plan if they were to move HQ to ex US. I would be surprised if their tax rate didn't ultimately move toward 20% if they leave the US. Furthermore, unlike other co's that have pursued inversion, they don't have a trapped cash issue (at least yet) as they don't have much if any ex US business. This is very different vs other co's that have pursued inversion such as Medtronic.

  3. I was about to post Anonymous' post. Thanks Anonymous. I agree that the knee jerk reactionary response has been over the top, I'm not sure its been inaccurate. No one is suggesting that Walgreens pay X-US taxes to the US. The fact is they pay a very small Federal tax anyway. The issue beyond the the earnings stripping mentioned above is the ocean of benefits for being overseas that the US provides- currency repatriotization, accounting tricks, etc. Not to mention the loss of jobs that will happen immediately. And for what benefit? Globalization?! There is no data that I am aware of that has ever shown global trade has been in any way of benefit to US taxpayers over many decades now- quite the opposite. I would be a little surprised at your position here, except that the US Pharmaceutical Industry has used this strategy for decades now. I'm sure we will just disagree on this one. But, a portion of the paying public- they may not be so forgiving. What Walgreens will show them, is that they dont care.

  4. Just so you know, I have been very skeptical of the Alliance Boots deal. See Walgreen+Alliance Boots: Questions about Global Pharmacy.

    But after the Alliance Boots transaction is completed, the new post-deal Walgreens will get almost half of its revenues from ex-US retail and wholesale (EU, Asia, South America). It will be a global company with major US pharmacy operations. Stefano Pessina, the single largest shareholder, is not a U.S. citizen.

    As I see it, the situation will be very different from the critics who make it sound like a U.S. retailer will arbitrarily relocate as a tax dodge.

  5. tax battles over who pays and how much are not new...context here is
    relatively new for US....inversion is just one arena of where multinational corporations and individual national governments determine their power vis a vis one another .....most nation states have long recognized this battle....and there is growing public recognition in the US of limits of the national government vis a vis multinationals....

  6. Yes, the company could use various post-inversion tax strategies. Investor's Business Daily suggests that Obama could unilaterally prevent "earnings stripping" using a 1969 law. See How Obama Could End Walgreen's Tax-Inversion Hopes.

    But as I note below, the post-transaction company will no longer be a fully US company, so it seems reasonable to pursue a strategy that avoids US taxes on non-US operations.