Walgreens has decided against moving its tax residence from the United States
to Switzerland by way of a "corporate inversion" in exercising its option to purchase the remaining 55 percent stake in Alliance Boots.
The transaction, which is expected to be completed in the first quarter of
2015, involves a share purchase to combine fully the two companies into what
is being called "the first global pharmacy-led, health and wellbeing enterprise."
It will include Walgreen Co. (the largest drugstore chain in the US), Boots
(the UK and Republic of Ireland's leading pharmacy-led health and beauty retailer),
Pharmaceutical Wholesale and International Retail (including Alliance Healthcare,
Europe's largest pharmaceutical wholesaler), and the remaining Global Brands.
Although Walgreens presently has an effective tax rate close to the headline
US corporate tax rate of 35 percent, it has decided not to gain the reported
USD4bn in tax savings over five years that could have been available to it by
moving the company's base to Switzerland, where Alliance Boots is headquartered.
A new holding company will now be formed, to be named Walgreens Boots Alliance,
Inc., domiciled in the US and headquartered in the Chicago area.
Corporate inversions have been used by US companies when bidding for foreign
companies as a means of moving away from America's high corporate tax rate.
Under the present tax code, a company that merges with an offshore counterpart
can, under certain conditions, move its headquarters abroad, and take advantage
of the lower corporate tax rates in foreign jurisdictions.
Despite the fact that "the original option transaction would not qualify
for an inversion under the current tax inversion rules," Walgreens confirmed
that it "undertook an extensive analysis to explore the feasibility of
a restructured inversion transaction that would provide the company with the
customary level of confidence needed to withstand Internal Revenue Service (IRS)
review and scrutiny."
It added that the company "considered a wide range of issues, including
the potential financial benefits (and their sustainability) and the technical
viability of a restructured inversion transaction under current US law. The
company also was mindful of the ongoing public reaction to a potential inversion
and Walgreens unique role as an iconic American consumer retail company with
a major portion of its revenues derived from government-funded reimbursement
programs [and with, currently, essentially no foreign operations]."
"We took into account all factors, including that we could not arrive
at a structure that provided the company and our board with the requisite level
of confidence that a transaction of this significance would need to withstand
extensive IRS review and scrutiny," said Greg Wasson, who will be President
and CEO of Walgreens Boots Alliance. "As a result the company concluded
it was not in the best long-term interest of our shareholders to attempt to
re-domicile outside the US."
Aside from concerns that it could have been involved in a protracted argument
with the IRS, and potentially lose government contracts, Walgreens is thought to have
been influenced by the growing anti-inversion political discussions in
the US, and in particular the legislative proposals in Congress, and White
House efforts to look at possible administrative actions that could reduce the
tax benefits of inversions.