United States Big Business: Acting Local. Paying Global

If you walked into the Walgreens at Bee Ridge and Tamiami Trail in Sarasota, Florida on this past 4th of July weekend, you would have found an end cap of American flags, plates, cups, and napkins. We imagine that you would have found similar displays of patriotic paraphernalia at the more than 8,000 Walgreen drugstores across the United States.

There's only one problem, as Walgreens has shown over the past few weeks, this faux patriotism is more about profits than dedication to country. What Walgreens should have had on its end caps this 4th of July instead of items with the stars and stripes were ones emblazoned with Great Britain's union jack. Here's why.

Walgreens is considering merging with Alliance Boots, a European drugstore chain and moving its corporate headquarters to Switzerland. The primary reason for Walgreens contemplating this relocation appears to be to derive the benefits of much lower corporate tax rates in Switzerland. This could be seen as a typical business maneuver if it were not for Walgreen's espoused values.

Walgreens' mission statement, in part, reads as follows, "To be the most trusted, convenient multichannel provider and advisor of innovative pharmacy, health and wellness solutions, and consumer goods and services in communities across America."

Walgreens recently re-emphasized its commitment to America and its communities. As Andrew Ross Sorkin reports in an excellent article for the New York Times, approximately two years ago, the State of Illinois gave Walgreens $46 million in income tax credits over ten years in return for the company upgrading its corporate offices and creating 500 new jobs.

Gregory D. Wasson, Walgreens Chief Executive Officer, responded to this favorable treatment by proclaiming, "We are proud of our Illinois heritage. Just as our stores and pharmacies are health and daily living anchors for the communities we serve, we as a company are now recommitted to serving as an anchor for northeastern Illinois."

So much for trust!

The ploy that Walgreens might employ to change its taxable status is referred to as an "inversion." This struck us as an odd use of that word. So, we did a Google search to find the financial or business definition of inversion.

To our surprise, we did not discover one. What we did find was the following definition that seems to apply somewhat, "a change in the position, order, or relationship of things so that they are the opposite of what they had been."

If Walgreens were to complete this transaction and relocation, things would indeed be "the opposite of what they had been." But, "inversion" seems a relatively innocuous way to describe an action that is so transformative to the fundamental relation between a corporation and its declared country of domicile.

We began to wonder if that term had been selected deliberately to mask the true impact and import of such an action and to try to minimize public resistance and reaction to it. What if such a move were labeled a perversion, a subversion, or a reversion?

Following are Google-sourced definitions of those words that might apply to this situation and be used rather than "inversion":

  • Perversion: the alteration of something from its original course, meaning, or state to a distortion or corruption of what was first intended.
  • Subversion: actions designed to undermine the military, economic, psychological, or political strength or morale of a governing authority
  • Reversion: an act or process of returning to an earlier condition or state

Would these words make the tactic less palatable and acceptable? We think so because how something is described can make it appear to be a benign or belligerent act.

Nevertheless -- whatever the word of choice -- inversion, perversion, subversion, or reversion -- the consequence is the same. It is an outpouring of wealth and resources from the coffers of the United States into the coffers of corporations and nation states. It is a continued diminution and erosion of American "corporate civic and community commitment."

This might not be so bad if the Walgreens case was an isolated incident. But, it is not. A new study by the Congressional Research Service discloses that since 1983, 76 U.S. corporations have moved their tax domiciles outside the U.S. to avoid paying taxes in the United States.

This is an accelerating trend with more and more companies considering or doing inversions. In the past decade, several firms such as Mallinckrodt Pharmaceuticals and Perrigo Co. Plc, have rebased to Ireland for tax purposes. Others that have followed the inversion path include well known names such as Ingersoll Rand, Eaton and Carnival Corporation.

Medtronic, a medical technology group, has announced plans to buy Covidien Plc in Ireland in a deal which apparently has will have some tax ramifications. AbbVie, a pharmaceutical spin off of Abbott Laboratories is in merger talks with Shire, a competitor in Ireland. And, Pfizer was aggressively pursuing its Ango-Swiss counterpart, AstraZenca, until its offer was rebuffed by that company's board.

So, in no way is Walgreens alone in looking to headquarter elsewhere in order to reduce its tax burden. In fact, in Walgreens defense, they have not formally stated an intent to "invert." It is reported that their decision in this regard will be made at a board meeting in late July or early August.

Other major U.S. companies have already made their decisions to take the "tax shelter" route not through inversion but by taking advantage of existing U.S. tax laws. Current law states that American corporations do not have to pay U.S. taxes on profits they garner worldwide as long as that money is reinvested in foreign operations. American taxes are paid when earning are repatriated and brought back to invest stateside.

This has created a situation in which our major companies retain major financial holdings outside the U.S. Audit Analytics, a research firm in Sutton MA, reports that the nation's top 1,000 companies had $2.1 trillion in such earnings last year. In 2008, foreign earnings constituted 5.8 percent of those companies' total assets. The foreign earnings percentage increased to 8.7 percent in 2013.

There is no doubt that much of those foreign earnings are legitimate. There is little doubt, however, that some of it is suspect.

According to Floyd Norris of the New York Times, in 2010 United States companies earned $129 billion in the three small islands of Bermuda, the Cayman Islands and the British Virgin Islands which have a combined population of only 147,400. Norris also reports that a recent study by the U.S. Public Interest Research Group Education Fund and Citizens for Tax Justice disclosed that 372 of the companies in the Fortune 500 had a "...total of 7,827 subsidiaries in countries that the groups view as tax havens."

This is evidence that for many major United States corporations and paying taxes, the business school advice of "think globally, act locally" is irrelevant. Their dominant practice instead is to "Act local. Pay global."

That means fully exploit the connection to being an American company and take maximum advantage of the numerous benefits the United States provides to large business entities which, as Allan Sloan points out in his recent Fortune article include "...our deep financial markets, our democracy and rule of law, out military might, our intellectual and physical infrastructure, our national research programs, all the terrific places our country offers for employees and their families to live."

But, at the same time, these companies make -- or claim to make, their money elsewhere.

Some might view this approach as necessary because the United States taxes for corporations are too high in comparison to other countries. Others might argue it is unpatriotic. In our opinion, neither viewpoint is correct.

Yes, the highest corporate tax rate on taxable income in the U.S. is 35%. Truth be told, because of tax loopholes and deductions and incentives, very few large corporations come anywhere close to paying that rate.

In a study released last year, the GAO reported that in 2010 profitable companies paid an effective federal tax rate of 13 percent on their world wide earnings.

As for the patriotism or tax avoidance or tax reduction, in spite of what the majority of the Supreme Court ruled in Citizen's United and subsequent cases since then corporations are not people. This is especially true for those organizations referred to as multinational corporations -- businesses located in many countries around the globe.

The descriptor "multi-national" is a misnomer. A more accurate descriptor would be "global." The global corporation has no allegiance or loyalty to any nation state.

As has been demonstrated time and time again over the past few decades, the global corporation is focused solely on maximizing shareholder value. That corporation might have once been a balanced focus on shareholders, employees and communities. But, for most of these businesses, those days are long gone.What used to be the triangle of corporate social responsibility has become a one way expressway transferring buckets of money from the United States to foreign lands.

If our assessment is correct, what needs to be done? The answer is simple -- the United States needs to be made the tax payment place of choice for large corporations.

But, the solution for accomplishing this is not. That will require a blend of incentives, restrictions/sanctions and eventually full-blown tax reform.

On the incentive side, Senator Dick Durbin (D-IL) has recently introduced a bill called the Patriot Employer Tax Credit Act. His bill would give a credit of approximately $1,200 per worker to companies that keep their headquarters here in the U.S.

In our book, Working the Pivot Points to Make America Work Again, we advocated that companies be allowed to repatriate their profits at a tax rate below the current marginal tax rate of 35 percent. We recommended that those businesses be taxed at a modest rate on those repatriated profits -- say something like 15 percent and that they pay nothing if they took actions such as investing those dollars in job creation in their own companies and supply chains or in supporting governmental infrastructure projects.

On the restrictions/sanctions side, the Levins -- Senator Carl (D-MI) and Representative Sandy (D-MI) have introduced a bill to make inversions much tougher to do. Current law requires a business that inverts to do "significant business" in its new domicile" and that the company it buys own at least 20 percent of the inverted firm. The Levin's bill would require a change in management and that foreign firm shareholders own at least 50 percent of the combined company.

In terms of full blown tax reform, the major requirement is that it must be fair. What is fair is in the eye of the beholder. And, one might think that Democrats and Republicans might never see eye-to-eye on what is fair. That is certainly true currently given the deadlock of the nation's Congress during this mid-term election cycle.

But, the future may be more forgiving and bipartisanship may raise its less than ugly head again to break this crippling grip and to make Americans believe in their legislators again. In this regard, we note that the Republican-sponsored Tax Reform Act of 2014 included a tax of 7.5 percent a year on cash held offshore and 3.5 percent on other retained offshore earnings. That's a start and a basis for negotiating and cooperating to address this most serious problem.

In closing, we need comprehensive tax reform to stem the tide of tax inversion and avoidance sweeping corporate America. We need a plan that appeals to these companies' pocketbooks and not their patriotism.

To modify a phrase, If you've got them by their pocketbooks, their hearts and minds will follow. That's not a conversion but it will invert the inversion and result in United States big business "Acting Global" while "Paying Local."

To get regular updates on what Frank and Ed are writing and reading, subscribe to their newsletter by going to the following link: http://bit.ly/pivotsignup