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Walgreens Case Study Essay

Walgreens has been a U. S. company since Charles R. Walgreen Sr. opened his first drug store in Chicago in 1901. Today, Walgreens has a total of 8,678 stores, in every state and U. S. territories. Last year, however, it proposed to become a Switzerland firm. The CEO of Walgreens planed to merge with Europe-based Alliance Boots to acquire a legal address abroad even though Walgreens earns most of its profits in America. The reason had nothing to do with manufacturing costs or access to foreign markets. Instead, it was to escape U. S. taxes. The move is called tax inversion.

Tax inversion is a largely American term for the process of relocating a corporation’s legal domicile to a lower-tax nation, or corporate1. For example, U. S. drug maker AbbVie bought its British competitor Shire in 2014 and planed to move to the United Kingdom, where the corporate tax rate fell to 21 percent2. In fact, an address change doesn’t necessarily mean a real move. Companies are free to keep their top executives in the U. S. , and most of them do. According to research from Bloomberg, about 48 companies have reincorporated in low-tax countries since 1982, including 17 since 20123.

And the number is still increasing despite ruletightening by the Congress and legislators to limit it. Nowadays, 1 Source: https://en. wikipedia. org/wiki/Tax_inversion 2 Source: http://ww2. cfo. com/accounting-tax/2014/10/abbviereconsider-54-billion-shire-inversion/; 3 Source: Bloomberg Business; http://www. bloomberg. com/infographics/2014-09-18/ tax-runaways-tracking- inversions. html: OBJ there are two ways to execute an inversion strategy. One is selfinversion. A company can simply reincorporate abroad in a country with lower taxes, like Ireland. Another is inversion through merger with or acquisition of a foreign company.

The new combined company can incorporate anywhere it choose. Why do these corporations want to flee the U. S. tax system? What are the benefits of tax inversion? I conclude two main reasons. Fist of all, the U. S. corporate income tax rate is the highest in the developed world. Corporate profits between $100,000 and $335,000 are taxed at a 39 percent rate, while higher profit levels are taxed between 34 and 38 percent4. The more profits in income taxes the corporation pays, the less money is available for shareholders and for investing in future growth.

Tax inversion can help a company lower their tax bills by reincorporating its business in a foreign country with lower tax rate. Secondly, in the United States, tax laws are “comprehensive”. This means that a company incorporated in the U. S. must pay income taxes on profits made anywhere in the world. This is very different from other countries, where only domestic profits are taxed. Therefore, a company can escape U. S. tax on worldwide income when it conducts tax inversion.

For instance, after Florida-based Burger King announced acquisition of Tim Hortons and put the headquarters of the combined company in 4 Source: https://en. ikipedia. org/wiki/ Corporate_tax_in_the_United_States; OBJ Canada, it could avoid $117 million in U. S. taxes by never having to pay corporate income tax on foreign profits it holds off shore5. Tax inversion helps American corporations save a great amount of their profits. That’s why Medronic, founded in a Minneapolis garage, turned Irish; why Pfizer, established in a Brooklyn laboratory, turned British; and why Mylan Pharmaceuticals, a Pittsburgh-based drugs maker, turned Netherlandish. Tax inversion makes American companies happy. However, neither democrats nor republicans like inversion.

Because tax inversion is eroding the U. S. tax base, forcing individual taxpayer, small business, and domestic corporations to make up the difference. Since most resulting companies are not really moving overseas, they can continue to enjoy all of the public services they depend on-good schools, efficient roads, market inspectors, and other public serviceswhile paying no tax and passing their bills to other taxpayers. For example, Walgreen announced it would not move its headquarters to Switzerland after it merged with Alliance Boots.

Such a plan might have cost U. S. axpayers $4 billion over five years, according to a report by the nonprofit group Americans For Tax Fairness and the labor group Change To Win6. A lot of people call tax inversion the inevitable consequence of a flawed tax system and assume a passive attitude towards the solution of tax inversion. However, I believe that following two methods can effectively limit tax inversion. Firstly, legislation is one 5 Source: http://www. reuters. com/article/2014/12/11/us-usa-taxburgerking-idUSKBNOJPOC|20141211 6 Source: Americans For Tax Fairness, Change To Win: How Walgreen’s tax dollars can be used; OBJ option.

It would provide a stricter definition of inversion than current law. For example, in current law, if an American company had a self-inversion, at least 25 percent of the company’s assets, employees, profits, and sales should come from that country. The new law should increase the proportion. Secondly, a full revamp of the tax code is needed, including lowering the corporate rate and limiting taxes on foreign profits. Also, after relocating its legal address, the entity would still be taxed as an American company if it is majority controlled by the American owners.

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