Drugstore chain Walgreen declines to pursue overseas reorganization to trim tax bill

Walgreen plans to keep its roots firmly planted in the United States, saying it will no longer pursue an overseas reorganization that would have trimmed the amount of U.S. taxes it pays.

The nation’s largest drugstore chain said that, as previously planned, it will buy the remaining stake in Swiss health and beauty retailer Alliance Boots that it does not already own. It will not pull off an inversion, however, a tactic that has become increasingly popular with U.S. companies seeking tax relief, but which has sparked a backlash in Washington and among the public.

The pressure from investors remains intense, however, and shares of Walgreen plunged 11 per cent before the opening bell Wednesday.

There have been 47 U.S. companies that have put together inversions through tie-ups with foreign businesses over the past decade, according to the Congressional Research Service. Several others are planning or considering the move, including the drugmaker AbbVie, which announced last month a roughly $55 billion combination with Irish drugmaker Shire Plc, which is incorporated in the United Kingdom.

Walgreen, however, said it was not confident such a deal could withstand IRS scrutiny.

There is also an intensifying pushback from Congress and President Barack Obama due to lost U.S. revenue from corporate taxes from inversions.

And on Tuesday, the Treasury Department said that it was considering actions that could limit the ability of companies to use the tactic.

In an inversion a U.S. company reorganizes in country with a lower tax rate by acquiring or merging with a company overseas. Inversions allow companies to transfer money earned overseas to the parent company without paying additional U.S. taxes. That can help fund dividends and buybacks.

Inversions also can reduce a corporation’s corporate tax liability in other ways and they provide some relief from the U.S. corporate tax rate of 35 per cent, which is the highest in the industrialized world.

Walgreen Co. had drawn criticism for considering an inversion, in part because it receives a portion of its revenue through government funded programs that help cover the sick and elderly people. The company addressed that issue Wednesday.

“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,” Walgreen Co. said in a statement.

Morningstar analyst Vishnu Lekraj said Wall Street had largely expected Walgreen to pull off an inversion, even though he thought there was a strong chance it wouldn’t happen, in part due to public backlash.

Walgreen shares fell $7.63 to $61.49 in pre-market trading.