US groups ponder the great tax escape
U.S. Sen. Dick Durbin, D-Ill., talks to Walgreens clerk Estella Washington as he shops after a news conference Wednesday, Aug. 6, 2014, in Chicago. Durbin praised Walgreen, the nation's largest drugstore chain, for declining to pursue an overseas reorganization to trim its U.S. taxes. (AP Photo/M. Spencer Green)©AP
Walgreen’s decision to keep its domicile in the US will not deter other US healthcare companies from striking transatlantic deals to cut their American tax bills, according to corporate advisers.
The US pharmacy chain had come under pressure from investors to shift its tax domicile to Switzerland or Britain as part of the £6bn takeover of Alliance Boots, but this week concluded such a move was not in the best long-term interest of its shareholders.
Walgreens said it was mindful of the public reaction to a potential inversion deal and its role as an “iconic American consumer retail company with a major portion of its revenues derived from government-funded reimbursement programs”. But advisers said that lesser-known companies contemplating so-called inversion deals would ride out the storm.
Billy Tauzin, a former congressman and ex-head of a pharmaceuticals lobby group who now advises companies, said it would make sense for businesses to delay their inversion plans until after November elections, but that few would scrap them.
“They’re all public companies and investors expect them to make economic decisions, not necessarily just politically smart decisions,” said Mr Tauzin. “They might want to time it differently, but I don’t think they’re going to change what is the right economic decision for their companies.”
The two biggest inversion deals agreed so far have involved relatively low-profile US healthcare companies. Medtronic, the medical devices maker, agreed to buy Dublin-based Covidien for $42.9bn in June, followed a month later by the £32bn takeover of UK-listed Shire by AbbVie.
People close to those deals said they were confident they would go ahead – but declines in the share prices of Shire and Covidien this week reflected investor fears.
Political attacks on inversions have been building for weeks. President Barack Obama and some Democrats are seeking to make such deals a campaign issue ahead of midterm elections on November 4, and have criticised the “corporate deserters” who had “renounced their US citizenship” by moving offshore.
Republicans have been equally critical of the deals, but they want any legislative solution to be part of broader tax reform, which is unlikely to pass the US Congress. The Obama administration this week said it was exploring ways to use the president’s executive powers to limit inversions, but lawyers say it is not clear it has sufficient authority.
Before its announcement, Walgreens had been braced for anti-inversion protests and boycotts from union groups such as Change To Win, a labour federation.
We had a lot of perspectives from the political side, the White House, consumers, and we looked at all the issues . . . We did not think the structure had a high enough confidence level to withstand that
- Greg Wasson, Walgreens’ chief executive
“We had a lot of perspectives from the political side, the White House, consumers, and we looked at all the issues,” said Greg Wasson, Walgreens’ chief executive. “We did not think the structure had a high enough confidence level to withstand that.”
On the day Walgreens announced its decision, a Change To Win official said the group received a new consignment of now redundant signs and banners with slogans such as “Walgreens – Don’t Short Change America”.
But Mr Tauzin said it would be harder to stir public opposition to healthcare groups. “I’m a cancer survivor and a company in California made the product that saved my life. I don’t think it would have mattered to me if I was upset with that company politically,” he said.
“On the other hand, if I can buy the same over-the-counter product at Walmart or CVS and I’m upset with Walgreens, I might make a different choice.”
It is a big dilemma for Pfizer, the largest US drugmaker by sales, which in May attempted what would have been the biggest inversion so far with a £69.4bn bid for the UK’s AstraZeneca. While it is a less visible brand than Walgreens, it is still a household name associated with well-known drugs such as Viagra and Lipitor.
Underlining the sensitivity for high-profile consumer brands in particular, Bob Iger, the chief executive of Walt Disney, this week ruled out relocating overseas.
An adviser to Walgreens said the pharmacy chain was also concerned that its rival CVS Caremark would exploit an inversion by painting Walgreens as unpatriotic.
“There was some growing concern among Republican political operatives and trade associations like the Chamber of Commerce that the inversion issue could get traction in key election races,” he said. “This reduces that as an issue.”
Nell Geiser, an associate director at Change To Win, the labour group, disagreed. She vowed to keep up the pressure on companies considering inversions – including those with little name recognition – and said activists would shine a harsh spotlight on businesses that depended on federal healthcare spending and other US government funds.