Investors punish Walgreen's for not avoiding taxes

When it comes to buying American, Walgreen (WAG) customers can continue waving their stars and stripes.

That's because the largest U.S. drugstore said it won't take advantage of a tax strategy known as an inversion, an increasingly common ploy that helps multinational companies reduce their tax burdens.

Walgreen had been pondering whether to take advantage of the strategy, which would have made it one of the best known consumer brands to shift its headquarters overseas in order to pursue lower taxes. The move would have cost Americans $4 billion in lost tax revenue over five years, according to advocacy group Americans for Tax Fairness.

Tax inversions are orchestrated when an American company merges with a foreign firm and shifts its headquarters overseas, allowing them to bypass some U.S. taxes. It's become a hot-button topic on Wall Street and Capitol Hill, given the fact that the technique may result in a loss of $20 billion in taxes over the next decade, according to a study from the Joint Committee on Taxation.

But Walgreen's decision to stay put in the U.S. reveals a split between the expectations of American consumers, some of whom view tax inversions as unpatriotic, versus shareholders, who want companies to act in their best financial interest.

Shares of Walgreen slipped nearly 12 percent in mid-morning trading on Wednesday, after the company disclosed its decision and plans to buy the remaining stake in the British pharmacy chain Alliance Boots that it doesn't already own. It should be noted that a company's stock sometimes declines after announcing an acquisition.

"The company concluded it was not in the best long-term interest of our shareholders to attempt to re-domicile outside the U.S.," Walgreen chief executive Greg Wasson said in the statement.

The decision comes after increasing concern in the Obama administration about the strategy, with Treasury Secretary Jacob Lew calling the ploy a corporate effort "to avoid paying their fair share of taxes."

On top of that, the Obama administration is considering ways to end the tax benefit, effectively curtailing the economic incentive of shifting corporate headquarters overseas, The New York Times reported on Tuesday.

Walgreen cited "ongoing public reaction" as a reason it ruled against the strategy, given its "unique role as an iconic American consumer retail company." It added that the original option transaction would not have qualified for an inversion under current rules.

Of course, there's the chance that Walgreens may be an anomaly, rather than a new trend. For one, it relies on the goodwill of consumers for sales, and the potential tax inversion had led to rumblings of a boycott.

Among the 76 U.S. corporations that have moved their tax domiciles out of the country since 1983, most are hardly household names. Take Foster Wheeler or Noble Drilling Services. While both companies may be well known within their industries, these are businesses that don't rely on positive brand perceptions with the average consumer. (Foster Wheeler moved to Bermuda in 2001, while Noble Drilling moved to the Cayman Islands in 2002.)

Given the financial incentives for U.S. companies to make the trip overseas, the strategy is likely far from played out.

  • Aimee Picchi

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