Walgreens (WAG) first pharmacy opened 113 years ago inside a hotel on Chicago's South Side and this year, the chain will derive nearly all its sales and most of its profits from its 8,700 U.S. locations. But Walgreens is currently thinking about leaving American shores, as part a plan to buy the rest of Alliance Boots GmbH, which operates a U.K. drugstore chain and is based in Switzerland. The move could help Walgreen's lower its U.S. tax bill saving the company hundreds of millions of dollars a year -- money that wouldn't flow into the U.S. Treasury. If it goes ahead, it would be an unusual use of the controversial and complex maneuver known as an inversion.
While well tested among pharmaceutical and manufacturing companies that earn much of their income overseas or have assets like patents that are held offshore, the move has never been attempted by a major U.S. retailer, according to tax experts. The maneuver would be a bet on the future. Apart from Alliance Boots' contributions, Walgreens makes all of its money in the U.S. But with the domestic market for drugstores now saturated -- 75 percent of Americans live within five miles of a Walgreen-owned pharmacy -- investors and analysts see faster growth coming from places like China and Latin America.
A tax inversion, which would relocate headquarters to a more tax-friendly country like Switzerland, would ensure that those profits aren't stuck overseas and avoid the tax hit that otherwise would come with bringing the money back to the U.S. Freed up, that cash could be used to buy back shares, pay dividends or reinvest in Walgreens U.S. stores.
Americans for Tax Fairness, a liberal tax reform group, estimates that Walgreen would pay $4 billion less in taxes over the next five years if it does an inversion, based on its calculations. Others say it would be only half that amount.
One way or the other, the move wouldn't let Walgreens escape U.S. taxes on the share of profits it generates in this country. Walgreens' spokesman Michael Polzin said the company would still pay at least $2 billion a year in federal, state and other taxes. But an inversion would facilitate ways to reduce Uncle Sam's cut through so-called income-shifting transactions.
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