Original Story: USAToday.com
DIXON, Ill. — The Walgreens drugstore chain proudly touts itself as "the pharmacy America trusts."
But
many here in this small river town where the founder of the company got
his start complain that the drugstore chain is on the precipice of
turning its back on the USA.
Walgreens, the USA's largest
drugstore chain, with more than 8,500 stores, soon will decide whether
to take advantage of a loophole in U.S. tax law that would allow it to
save billions of dollars by moving its headquarters to Europe, where it
is on the verge of acquiring controlling interest in Alliance Boots, a
Swiss-based company that operates drugstores in Britain. A Tulsa Business Tax Lawyer said that giant corporations often look to move overseas for the purpose of cutting there taxes.
From
the shareholders' perspective, making the move is a no-brainer: It
could save the company roughly $4 billion over the next five years.
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.
The loophole is known as tax
inversion, a controversial tactic that allows a company that does most
of its business in the USA to cut its federal tax bill by merging or
buying an overseas company in a lower-tax country and then nominally
relocating its headquarters there.
Despite years of on-and-off
efforts by lawmakers in Washington and the IRS to close the loophole,
dozens of American companies have used it — several in recent months.
The
first corporate inversion to capture attention occurred in 1982, when
oil-and-gas company McDermott moved its headquarters to Panama. It
wasn't until 1994, after cosmetics company Helen of Troy moved to
Bermuda, that the IRS raised concerns that such restructurings were
motivated by the desire to dodge taxes.
This year alone, eight
major U.S. companies — including AbbVie, Medtronic and Mylan — have
announced plans to shift their headquarters overseas in an effort to
trim their corporate tax rate, which hovers around 35% in the U.S. and
is among the highest in the world.
Earlier this week, President
Obama called inversion an "unpatriotic tax loophole" and pressed
Congress to pass legislation to stem the flow of corporations that are
effectively renouncing their U.S. citizenship. Inversion could cost the
Treasury nearly $19.5 billion over the next decade, according to
Congress' Joint Committee on Taxation.
Analysts say perhaps no
company with a Main Street profile that matches Walgreens' — the
country's largest pharmaceutical chain, with $72 billion in annual sales
— has used the loophole, and Walgreens' pending decision is bringing
unprecedented attention to the issue.
"I don't know how this
inversion doesn't happen," says Christopher Geier, of the Chicago-based
investment banking firm Sikich. "They'll get some bad press, but I don't
see a big enough reaction from consumers on this to change where this
appears to be heading."
Here in Dixon, the talk of Walgreens moving to Switzerland resonates in a personal way.
Charles
Walgreen moved to Dixon as a teenager and got his start in the business
working at a pharmacy, a job he took after injuring himself working at a
shoe factory in town. Residents here recall Walgreen taking Boy Scouts
up on his Sikorsky S-38 amphibian aircraft, which he would fly back and
forth from the Chicago area and land on the Rock River, near the
family's estate here.
As a young man, he moved to Chicago to seek
his fortunes and eventually started his drugstore chain. But he opened
his second pharmacy here in his adopted hometown — where he became
revered as the city's second-favorite son. (President Ronald Reagan, who
grew up here and caddied for Walgreen at the Timber Creek Country Club,
is Dixon's most celebrated hometown boy.)
Walgreen, who died in
1939, saved the Dixon National Bank from going out of business during
the Great Depression. The family also led fundraising for a statute
erected in 1930 along the Rock River depicting a young volunteer named
Abraham Lincoln, who spent time here during the Black Hawk War.
Charles
Walgreen Jr., the founder's son, won the bid during World War II to
open a store at the newly built Pentagon by giving all store profits to
the Pentagon Post Restaurant Council, which supervised food service in
the complex.
"Walgreens' attitude was so patriotically generous
that no competitor could possibly better it," declared a weekly
publication from the War Department.
Myrtle Walgreen, the wife of
the company's founder, also was a good friend of the people of Dixon.
James Burke, Dixon's mayor, says legend has it that at one of the
regular coffee klatches at Dixon's Walgreens, she offered an
extraordinary stock tip to some of the city's most prominent citizens.
"She
told them we are getting ready to introduce a new line of product that
you might consider investing in," says Burke, who has called on
Walgreens to ditch the tax inversion plan. "That product was the
tampon."
TRADING WALGREENS FOR CVS?
Larry Dunphy, who owns
an independent bookstore in Dixon, says he takes pride in buying stocks
in Illinois companies such as McDonald's, John Deere and Walgreens. But
he says he's told his financial adviser to dump his stock in Walgreens
and buy CVS if the company goes through with the inversion.
In
the end, Dunphy says the public outcry may not have an impact on
Walgreens' decision, but it could have a long-term effect on how
companies approach inversion in the future and spur Congress to change
laws to give companies an incentive to stay put.
"Will there be
enough people who go to CVS or the local pharmacy that will offset the
$4 billion that Walgreens will make by moving?" Dunphy says. "Maybe not.
But I hope the damage this is doing to Walgreens' image is something
that companies in the future will consider before moving to cut their
share of taxes."
Walgreens CEO Gregory Wasson, who, along with
his board, has come under intense pressure from shareholders to move the
headquarters to Switzerland, says the company will decide soon whether
to move its headquarters.
Early in 2014, Wasson said publicly
that an inversion wasn't under consideration. The Deerfield, Ill.,
company bought 45% of Switzerland-based Alliance Boots in 2012 and has
an option to buy the rest of the company next year, which would create
the opportunity to make the move.
But after a private meeting in
France with a shareholder group — including Goldman Sachs Investment
Partners and hedge funds Jana Partners, Corvex and Och-Ziff — Wasson
began to change his tune.
He made clear in a call with Wall
Street analysts last month that an inversion was very much a possibility
as Walgreens restructures the company ahead of completing the Alliance
Boots deal.
Michael Polzin, a company spokesman, says Walgreens
will do "what is in the best long-term interests of our customers,
employees and shareholders."
Polzin won't comment about the
impact a tax inversion would have on the company's image. The company
also declined to make Kevin Walgreen, the great-grandson of the
company's founder and the only member Walgreen family currently involved
in day-to-day operations, available for an interview.
"Whether
we do an inversion or not, we're still going to pay over $2 billion a
year in federal, state, employer and property taxes," Polzin says. "We
will still be one of the top job providers in America, with roughly
250,000 employees. We're going to continue to make capital investments
in the U.S. and expand our business here for decades to come."
That argument hasn't assuaged some Illinois lawmakers. A Tax Lawyer Tulsa representative is actively watching the case unfold.
In
a letter to Walgreens' board of directors this week, Rep. Jan
Schakowsky, D-Ill., warned that the company was in danger of sullying
its reputation as a community-minded corporation. She also sought to
remind the Walgreens board that roughly a quarter of its $2.5 billion in
profits last year were directly connected to federal programs — such as
Medicare, Medicaid and the Affordable Care Act.
"Everywhere you
look, the success of Walgreens is tied to the opportunities it has been
afforded by this country," she wrote. "To benefit from those resources
and then to refuse to pay your fair share of taxes needed to fund them
is inexcusable."
In a separate letter, Sen. Dick Durbin, D-Ill.,
took a shot at Walgreens' folksy motto. "Is 'the corner of happy and
healthy' somewhere in the Swiss Alps?" Durbin wrote. He added, "I
believe you will find that your customers are deeply patriotic and will
not support Walgreens' decision to turn its back on the United States."
Burke,
the Dixon mayor, says he hopes Walgreens will stay put. But if it
pushes ahead with the inversion, Burke notes there are three other
drugstores in his town.
"I think Walgreens will see that a lot of
Americans will take their business elsewhere," Burke says. "At some
point, how much profit is enough?"
