You may have heard that there's a trend in corporate America called the "inversion." Basically, an inversion is when a U.S.-based company decides it wants to avoid paying U.S. corporate income taxes, so it buys a foreign company, and then reincorporates in that company's country, effectively renouncing its U.S. citizenship and lowering its tax bill, by billions of dollars in some cases.
The allure of saving billions in taxes has produced a full-fledged inversion craze, with roughly 20 inversions occurring in the last year and a half. It has also royally pissed off the Obama administration, which is considering punitive measures against companies that invert for tax purposes. The best-known company to consider an inversion, the Walgreen Company, took the hint, announcing today that it won't move abroad after all. It will, instead, save money the old-fashioned way, by cutting costs.
According to the Times, the political backlash to the inversion trend is one of the reasons Walgreens's $5.27 billion acquisition of Alliance Boots, the British pharmacy chain, won't include a move to the U.K. for tax purposes. Investors were excited about the idea of the combined company saving as much as $4 billion over five years by reincorporating in the U.K., but Walgreen executives figured out that it probably wasn't a smart idea to put themselves in the political crosshairs at such a sensitive moment.
Walgreen said that it extensively evaluated doing an inversion, including the financial benefits and the public reaction, given the company’s “unique role as an iconic American consumer retail company with a major portion of its revenues derived from government-funded reimbursement programs.”
“The company concluded it was not in the best long-term interest of our shareholders to attempt to re-domicile outside the U.S,” Gregory D. Wasson, Walgreen’s president and chief executive, said in a news release.
So Walgreens, and its tax bill, will stay in the U.S. for the foreseeable future.
Ultimately, though, larger-scale reforms are needed to curb the inversion trend for good. Josh Barro details one appealing possibility: a plan that would abolish the corporate income tax altogether and offset the revenue loss with higher taxes on capital gains, top earners, and nonprofit organizations. Kevin Drum, correctly, points out that this will never happen, given Republicans' aversion to any net tax increases whatsoever.
For now, the best inversion-preventing weapon the Obama administration can wield is the cudgel of public opinion. By naming and shaming corporate inverters, the government can try to spark backlash against companies who consider giving up their U.S. citizenship for tax purposes. But while fear of reprisal from an angry Treasury Department might have kept an iconic American retail company like Walgreens from trekking abroad, lesser-known companies won't feel the same pressure to stay in the public's good graces. For most would-be inverters, there's strength in numbers.