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Renouncing Corporate Citizenship

A little less than two years ago, Gregory D. Wasson, the chief executive of Walgreen, sought a series of tax breaks from Illinois, where his company is based.

"We are proud of our Illinois heritage," he said at the time. "Just as our stores and pharmacies are health and daily living anchors for the communities we serve, we as a company are now recommitted to serving as an economic anchor for northeastern Illinois."

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The state gave Walgreen $46 million in corporate income tax credits over 10 years in exchange for a pledge to create 500 jobs and invest in upgrading its offices. The state also provided $625,000 in training money and $875,000 in other tax incentives.

Walgreens
Daniel Acker | Bloomberg | Getty Images
Walgreens

Mr. Wasson's actions, however, could soon run counter to his words. The same chief executive who said he was so "proud of our Illinois heritage" is now considering moving the company's headquarters to Switzerland as part of a merger with Alliance Boots, a European drugstore chain.

Why? To lower Walgreen's tax bill even further.

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Alarmingly, dozens of large United States companies are contemplating the increasingly popular tax-skirting tactic known as an inversion. Under the strategy, companies merge with foreign rivals in countries with lower tax rates and then reincorporate there while still enjoying the benefits of doing a large part of their business in the United States. AbbVie, a drug company spun off from Abbott Laboratories, is in talks to merge with its rival Shire, based in Ireland, Europe's equivalent of a tax haven. Medtronic announced plans to merge with Covidien, also based in Ireland. Similarly, Pfizer sought to buy AstraZeneca, based in Britain, where the tax rate is lower than it is in the United States, but AstraZeneca's board rejected that offer.

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In Walgreen's case, an inversion would be an affront to United States taxpayers. The company, which also owns the Duane Reade chain in New York, reaps almost a quarter of its $72 billion in revenue directly from the government; it received $16.7 billion from Medicare and Medicaid last year.

"It is unconscionable that Walgreen is considering this tax dodge — especially in light of the billions of dollars it receives from U.S. taxpayers every year," Nell Geiser, associate director of Change to Win Retail Initiatives, a union-financed consumer advocacy group, said in a statement.

Frank Clemente, executive director of Americans for Tax Fairness, called it "unfair and deeply unpatriotic if the company moves offshore while continuing to make its money here, leaving the rest of us to pick up the tab for its tax avoidance."

According to Americans for Tax Fairness, a move by Walgreen to Switzerland would most likely cost United States taxpayers about $4 billion over five years. Illinois taxpayers would also be hurt. The company's tax rate would be cut to 20 percent as part of Alliance Boots from about 31 percent now. Interestingly, Alliance Boots, which was originally based in Britain, moved to Switzerland in 2008 in large part to lower its tax rate.

Mr. Wasson isn't hiding the fact the company is considering the move for tax reasons. On a call with investors and analysts last week, he plainly said that company leaders were examining "what the structure could do as far as our effective tax rate."

A spokesman for Walgreen did not respond directly to the contentions of Americans for Tax Fairness, but he did say,"Our management team and board are making significant progress evaluating the proposed transaction determining the timing and structure, the combined management team, additional synergy and cost reduction initiatives and potential changes to our future capital structure." He added: "We're looking at everything, and it's all interdependent." A decision is likely to come this summer.

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While it is not illegal for a United States company to seek to lower its tax rate by merging with a foreign company, such deals have large policy implications. If Walgreen were to move, would CVS Caremark be far behind? What about other companies? CVS's tax rate was about 34 percent last year, which would clearly make it less competitive than a reincorporated Walgreen, both in terms of pricing drugs and attracting investors.

A bevy of large investors is pressing Walgreen to make the move abroad. Jana Partners, Och-Ziff Capital Management, Goldman Sachs and Corvex held a meeting in Paris with Walgreen in hope of persuading it to move. Goldman has tried to distance itself from the debate by publicly saying that it did not take a position at the meeting.

All of these inversions — driven by lower rates and, in some cases, cash that United States companies have overseas that they don't want to bring home at current rates — highlight the need for corporate tax overhauls. Both Democrats and Republicans say they support lower corporate tax rates and the elimination of loopholes that would make our system more competitive and tax inversions less attractive. However, when it comes to the details, a huge gulf remains between the parties.

A number of short-term proposals have been made to restrict inversions while larger corporate tax overhaul is sorted out, if at all. The current law allows a company to reincorporate abroad if it acquires a foreign company in a transaction that transfers more than 20 percent of the shares to foreign owners. President Obama has sought to raise the threshold to 50 percent. While many Democrats appear to support a short-term solution, some Republicans, arguing that a Band-Aid approach could have unintended consequences, instead want to address inversions only in the context of an overall corporate tax overhaul bill.

Senator Richard J. Durbin, a Democrat from Walgreen's home state, Illinois, told The Chicago Tribune last week: "I am troubled by American corporations that are willing to give up on this country and move their headquarters for a tax break. It really speaks to your commitment."

Mr. Durbin has a personal reason to be upset: Walgreen has been a large beneficiary of his support.

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In 2010, he introduced as part of the Dodd-Frank Act the so-called Durbin Amendment — which some people called the Walgreen's Amendment — limiting the fees that banks are allowed to charge merchants for debit card transactions.

In seeking support on the floor of the Senate, Mr. Durbin told his colleagues that the Walgreen chief had contacted him. "And he told me that when they look at the expenses of Walgreen's," Mr. Durbin said, "it turns out the fees that Walgreen's pays to credit card companies is the fourth-largest item of cost for their business."

Given all of the benefits Walgreen has received over the years as a United States corporate citizen, it remains curious why Mr. Wasson would seek a new passport.

By CNBC anchor and New York Times reporter Andrew Ross Sorkin