Double Punch for ‘Inversion’ Deals

8/5/14
 
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from The Wall Street Journal,
8/5/14:

Walgreen Rules Out Tax-Avoiding Tactic as Treasury Gears Up to Challenge.

Overseas takeover deals designed to lower corporate taxes took a double-punch on Tuesday, with Walgreen Co. moving ahead with a foreign merger without the tactic and the U.S. Treasury Department saying it was looking for ways to deter the strategy.

Walgreen, the Deerfield, Ill., drugstore chain, has been under pressure from shareholders to reincorporate overseas to lower its tax bill as part of a potential deal with European drugstore chain Alliance Boots GmbH, which it already owns in part.

Walgreen won’t be moving forward with the tax move, known as an “inversion,” but it does plan to buy the 55% of Alliance Boots it doesn’t own, the people said.

The Walgreen situation has been widely watched because most tax-beneficial merger deals lately have been in the pharmaceutical industry, where many companies have substantial profits overseas. Walgreen is a mostly U.S.-based retailer, and it has been viewed as a test of whether the inversion craze would spread with gusto beyond health care to other industries.

Companies, especially ones in health care, have been busily striking inversion deals in the past year. But lately, a chorus has risen against the deals. President Barack Obama last month dubbed them “wrong” and called on Congress to do something about what he termed an “unpatriotic tax loophole.”

Treasury Secretary Jacob Lew has echoed that message while suggesting publicly that Treasury, which enforces finance and tax laws, didn’t have much authority to act without congressional approval.

But on Tuesday, a spokeswoman confirmed that Treasury “is reviewing a broad range of authorities for possible administrative actions that could limit the ability of companies to engage in inversions, as well as approaches that could meaningfully reduce the tax benefits after inversions take place.”

The spokeswoman said legislation passed by Congress is “the only way to fully address inversions,” but that Treasury was looking “to at least provide a partial fix.”

Walgreen shares fell more than 4% to $69.12 after Sky News reported an inversion wouldn’t be part of the acquisition. The stock was up 89 cents in after-hours trading.

At 35%, the U.S. corporate tax rate is high compared with other countries, but layers of tax breaks allow many firms to dramatically lower their tax bills.

Treasury officials looking into the matter are studying the extent of their potential powers while trying to determine what precise tax policies are driving the recent spate of these deals. Changes could focus on the way the federal government interprets section 7874 of the Internal Revenue Code that implements a 2004 law meant to address inversions.

That law left some ambiguity in how it should be enforced and gives the Treasury Department and Internal Revenue Service some flexibility in how the law is implemented.

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