Dan Mitchell offers a tax-saving strategy for Walgreen that can not happen fast enough for shareholders.
Some shareholders at Walgreen Co., based in Deerfield, are pressing the company to move its headquarters to Europe, where it owns nearly half of Swiss pharmacy giant Alliance Boots. Should Walgreen move?
Walgreen Co.’s purchase of Alliance Boots raises the question of whether the expanded company should be domiciled in the United States or overseas.
Many shareholders want a “corporate inversion” with the company based in Europe, possibly Switzerland. Some think this would allow Walgreen to avoid paying tax on American profits to Uncle Sam. This is not true. All companies, whether domiciled in America or elsewhere, pay tax to the IRS on income earned in the U.S.
But there is a big tax advantage if Walgreen becomes a Swiss company. The U.S. imposes “worldwide taxation,” which means American-based companies not only pay tax on income earned at home but also are subject to tax on income earned overseas. Most other nations, including Switzerland, use “territorial taxation,” which is the common-sense approach of only taxing income earned inside national borders.
The bottom line is that Walgreen, if it becomes a Swiss company, no longer would have to pay tax to the IRS on income that is earned in other nations. That’s not a trivial matter since that income already is subject to tax by other governments. Moreover, the U.S. has one of the world’s highest corporate tax rates, putting American-based firms at an even greater disadvantage.
Experts at UBS estimate that Walgreen faces a tax rate of more than 37 percent, while Boots has a rate of 20 percent. So if the combined company were based in Switzerland and got out from under America’s misguided tax system, the firm’s tax burden would drop, and UBS analysts predict that earnings per share would jump by 75 percent. That’s a plus for shareholders, of course, but also good for employees and consumers.
But ideologues on the left, even the ones who understand that the company would comply with tax laws, are upset that Walgreen is considering this shift. They think companies have a moral obligation to pay more tax than required.
This is a bizarre mentality. It assumes not only that we should voluntarily pay extra tax but also that society will be better off if more money is transferred from the productive sector of the economy to politicians.
The management at Walgreen should do what’s best for shareholders, workers and consumers. But the real lesson is that politicians in Washington should lower the corporate tax rate and reform the code so that America no longer is an unfriendly home for multinational firms.