WALGREENS EYES LOOPHOLE END RUN AROUND TAXES

Original Story:  USAToday.com

DIXON, Ill. — The Walgreens drugstore chain proudly touts itself as "the pharmacy America trusts."

But many here in this small river town where the founder of the company got his start complain that the drugstore chain is on the precipice of turning its back on the USA.

Walgreens, the USA's largest drugstore chain, with more than 8,500 stores, soon will decide whether to take advantage of a loophole in U.S. tax law that would allow it to save billions of dollars by moving its headquarters to Europe, where it is on the verge of acquiring controlling interest in Alliance Boots, a Swiss-based company that operates drugstores in Britain.  A Tulsa Business Tax Lawyer said that giant corporations often look to move overseas for the purpose of cutting there taxes.

From the shareholders' perspective, making the move is a no-brainer: It could save the company roughly $4 billion over the next five years.

But here in this town of 16,000 where just about everybody can tell you about company founder Charles Walgreen's impact on the community, such a move seems out of step with how the Walgreen family conducted business.

"I think he'd be rolling in his grave if he knew what was going on today," says Bill Jones, who runs the Northwest Territory Historic Center in Dixon and worked closely with the Walgreen family on building an exhibit at the museum honoring the founder.

The loophole is known as tax inversion, a controversial tactic that allows a company that does most of its business in the USA to cut its federal tax bill by merging or buying an overseas company in a lower-tax country and then nominally relocating its headquarters there.

Despite years of on-and-off efforts by lawmakers in Washington and the IRS to close the loophole, dozens of American companies have used it — several in recent months.

The first corporate inversion to capture attention occurred in 1982, when oil-and-gas company McDermott moved its headquarters to Panama. It wasn't until 1994, after cosmetics company Helen of Troy moved to Bermuda, that the IRS raised concerns that such restructurings were motivated by the desire to dodge taxes.

This year alone, eight major U.S. companies — including AbbVie, Medtronic and Mylan — have announced plans to shift their headquarters overseas in an effort to trim their corporate tax rate, which hovers around 35% in the U.S. and is among the highest in the world.

Earlier this week, President Obama called inversion an "unpatriotic tax loophole" and pressed Congress to pass legislation to stem the flow of corporations that are effectively renouncing their U.S. citizenship. Inversion could cost the Treasury nearly $19.5 billion over the next decade, according to Congress' Joint Committee on Taxation.

Analysts say perhaps no company with a Main Street profile that matches Walgreens' — the country's largest pharmaceutical chain, with $72 billion in annual sales — has used the loophole, and Walgreens' pending decision is bringing unprecedented attention to the issue.

"I don't know how this inversion doesn't happen," says Christopher Geier, of the Chicago-based investment banking firm Sikich. "They'll get some bad press, but I don't see a big enough reaction from consumers on this to change where this appears to be heading."

Here in Dixon, the talk of Walgreens moving to Switzerland resonates in a personal way.

Charles Walgreen moved to Dixon as a teenager and got his start in the business working at a pharmacy, a job he took after injuring himself working at a shoe factory in town. Residents here recall Walgreen taking Boy Scouts up on his Sikorsky S-38 amphibian aircraft, which he would fly back and forth from the Chicago area and land on the Rock River, near the family's estate here.

As a young man, he moved to Chicago to seek his fortunes and eventually started his drugstore chain. But he opened his second pharmacy here in his adopted hometown — where he became revered as the city's second-favorite son. (President Ronald Reagan, who grew up here and caddied for Walgreen at the Timber Creek Country Club, is Dixon's most celebrated hometown boy.)

Walgreen, who died in 1939, saved the Dixon National Bank from going out of business during the Great Depression. The family also led fundraising for a statute erected in 1930 along the Rock River depicting a young volunteer named Abraham Lincoln, who spent time here during the Black Hawk War.

Charles Walgreen Jr., the founder's son, won the bid during World War II to open a store at the newly built Pentagon by giving all store profits to the Pentagon Post Restaurant Council, which supervised food service in the complex.

"Walgreens' attitude was so patriotically generous that no competitor could possibly better it," declared a weekly publication from the War Department.

Myrtle Walgreen, the wife of the company's founder, also was a good friend of the people of Dixon. James Burke, Dixon's mayor, says legend has it that at one of the regular coffee klatches at Dixon's Walgreens, she offered an extraordinary stock tip to some of the city's most prominent citizens.

"She told them we are getting ready to introduce a new line of product that you might consider investing in," says Burke, who has called on Walgreens to ditch the tax inversion plan. "That product was the tampon."

TRADING WALGREENS FOR CVS?

Larry Dunphy, who owns an independent bookstore in Dixon, says he takes pride in buying stocks in Illinois companies such as McDonald's, John Deere and Walgreens. But he says he's told his financial adviser to dump his stock in Walgreens and buy CVS if the company goes through with the inversion.

In the end, Dunphy says the public outcry may not have an impact on Walgreens' decision, but it could have a long-term effect on how companies approach inversion in the future and spur Congress to change laws to give companies an incentive to stay put.

"Will there be enough people who go to CVS or the local pharmacy that will offset the $4 billion that Walgreens will make by moving?" Dunphy says. "Maybe not. But I hope the damage this is doing to Walgreens' image is something that companies in the future will consider before moving to cut their share of taxes."

Walgreens CEO Gregory Wasson, who, along with his board, has come under intense pressure from shareholders to move the headquarters to Switzerland, says the company will decide soon whether to move its headquarters.

Early in 2014, Wasson said publicly that an inversion wasn't under consideration. The Deerfield, Ill., company bought 45% of Switzerland-based Alliance Boots in 2012 and has an option to buy the rest of the company next year, which would create the opportunity to make the move.

But after a private meeting in France with a shareholder group — including Goldman Sachs Investment Partners and hedge funds Jana Partners, Corvex and Och-Ziff — Wasson began to change his tune.

He made clear in a call with Wall Street analysts last month that an inversion was very much a possibility as Walgreens restructures the company ahead of completing the Alliance Boots deal.

Michael Polzin, a company spokesman, says Walgreens will do "what is in the best long-term interests of our customers, employees and shareholders."

Polzin won't comment about the impact a tax inversion would have on the company's image. The company also declined to make Kevin Walgreen, the great-grandson of the company's founder and the only member Walgreen family currently involved in day-to-day operations, available for an interview.

"Whether we do an inversion or not, we're still going to pay over $2 billion a year in federal, state, employer and property taxes," Polzin says. "We will still be one of the top job providers in America, with roughly 250,000 employees. We're going to continue to make capital investments in the U.S. and expand our business here for decades to come."

That argument hasn't assuaged some Illinois lawmakers.  A Tax Lawyer Tulsa representative is actively watching the case unfold.

In a letter to Walgreens' board of directors this week, Rep. Jan Schakowsky, D-Ill., warned that the company was in danger of sullying its reputation as a community-minded corporation. She also sought to remind the Walgreens board that roughly a quarter of its $2.5 billion in profits last year were directly connected to federal programs — such as Medicare, Medicaid and the Affordable Care Act.

"Everywhere you look, the success of Walgreens is tied to the opportunities it has been afforded by this country," she wrote. "To benefit from those resources and then to refuse to pay your fair share of taxes needed to fund them is inexcusable."

In a separate letter, Sen. Dick Durbin, D-Ill., took a shot at Walgreens' folksy motto. "Is 'the corner of happy and healthy' somewhere in the Swiss Alps?" Durbin wrote. He added, "I believe you will find that your customers are deeply patriotic and will not support Walgreens' decision to turn its back on the United States."

Burke, the Dixon mayor, says he hopes Walgreens will stay put. But if it pushes ahead with the inversion, Burke notes there are three other drugstores in his town.

"I think Walgreens will see that a lot of Americans will take their business elsewhere," Burke says. "At some point, how much profit is enough?"

CATERPILLAR EXECUTIVE OUSTS COMPANY FOR TAX DODGING

Caterpillar Inc. used offshore subsidiaries in Switzerland and Bermuda to avoid about $2 billion in U.S. taxes from 2000 to 2009, boosting its earnings through a tax and financial statement fraud.
The company, the world’s largest construction-equipment maker, sold and shipped spare parts globally from an Illinois warehouse while improperly attributing at least $5.6 billion of profits from those sales to a unit in Geneva, according to the suit filed by Daniel J. Schlicksup. He was a global tax strategy manager for Caterpillar from 2005 to 2008.
Schlicksup, 49, sued in U.S. District Court in Peoria, Illinois, in 2009, claiming he was moved to a job that limits his career opportunities because he complained to superiors that the Swiss Structure ran afoul of U.S. tax rules. He’s seeking a court order to give him back his old job and prevent any retaliation. He also seeks stock options that he claims were wrongly withheld as well as legal fees and punitive damages.
His lawsuit, which calls the structure a tax dodge, followed a request for job protection he filed with the U.S. Department of Labor under provisions of the Sarbanes-Oxley Act, court records show. The law bars retaliation against corporate whistleblowers. Schlicksup declined to comment for this story. His attorney, declined to say whether Schlicksup has taken his concerns to the Internal Revenue Service.
A Caterpillar spokesman said the company has engaged in no wrongdoing, and its attorneys said in a court filing that Schlicksup’s transfer wasn’t a demotion. He declined to comment on the suit’s specific allegations, saying Caterpillar uses ethics training and complies with applicable tax laws and regulations.
It could be difficult to prove the company underpaid U.S. taxes. A former corporate tax attorney said IRS officials have had only mixed success recovering large settlements in corporate income-tax cases, and $2 billion would be an extraordinarily large recovery.
Peoria-based Caterpillar, which reported year over year earnings growth exceeding 250 percent in each of the last two quarters, is among several U.S. multinationals asking Congress to end U.S. corporate income taxes on profits earned abroad. The company had $3.7 billion of pretax income last year on $42.6 billion in revenue, 68 percent of which came from offshore.
The company is asking for a level playing field when we compete with foreign competitors. Caterpillar’s Swiss strategy, as described in depositions and exhibits attached to Schlicksup’s lawsuit, reflects one way U.S. corporations reduce their actual tax rates. Aided by lower taxes overseas, the company had an overall effective tax rate of about 26 percent on about $27 billion of pretax income from 2000 through 2009. The top federal corporate income tax rate in the U.S. is 35 percent.
U.S. multinationals including Google also report overall effective tax rates that are lower than the U.S. rate -- partly because of the effect of their overseas operations. Google’s overall effective rate for 2007 through 2009 was about 25 percent, based on disclosures in its annual reports. Its overseas tax rate for the period was 2.4 percent.
Caterpillar’s Swiss income is subject to a 10 percent tax rate. While the combined federal, state and local tax rate in Geneva is about 24 percent, companies frequently receive exemptions.
The company said in the document that one purpose of the Swiss structure is to lower its taxes. It also agreed that Caterpillar pays more tax to Switzerland and less tax to the United States than it would have without the strategy.
Around 1999, the U.S. parent company transferred the role of global purchaser of spare parts from third-party manufacturers from itself to the Swiss unit.
The Geneva subsidiary, Caterpillar SARL, or CSARL, had no spare-parts employees and did not work to sell or ship the parts, Schlicksup claims in the lawsuit. The parts are shipped to dealers around the globe from a warehouse in Morton, Illinois, about 10 miles southeast of Caterpillar’s Peoria headquarters, according to the lawsuit, which also describes the spare-parts business as the company’s most profitable line.
In order to shift profit to Switzerland, Caterpillar pretended to shift the management and control of a large portion of its most profitable business segment to Switzerland, but in reality the management and control of this business remains in the United States. Everything is done the same way it was done before except that on paper, now CSARL is doing it, not Cat, while in practice Cat is doing everything. While the Swiss unit nominally buys the parts from suppliers, it maintains its inventory in the U.S. unit’s Morton warehouse, where Caterpillar Inc. employees ship it and send invoices.
The lawsuit, which is in the evidence-gathering phase, alleges that the Swiss structure is improper because it has no legitimate business purpose beyond cutting Caterpillar’s U.S. tax bills.
Courts have generally sided with taxpayers who use foreign subsidiaries. You don’t need much substance in the foreign corporation for it to be accepted under current rules, and that’s a problem.
To survive a challenge, a taxpayer must show that transactions between the subsidiary and its parent were done with the intent of making a profit, whatever the tax consequences, and had realistic potential to create income.
The sale of parts was clearly profitable, so the question is whether a court would http://www.blogger.com/img/blank.gifbe satisfied with that or ask whether routing the sales via Switzerland had to have its own separate economic substance. It is suspect the likely answer is that the transaction satisfies economic substance as a whole, but it’s hard to tell without knowing more facts.Still, if the inventory is maintained in the U.S., that would raise questions of whether Caterpillar Inc. is deriving taxable income from it.
Some say the IRS and tax courts will find that the Swiss subsidiary doesn’t handle the Cannon spare parts transactions themselves -- and thus doesn’t meet the standard.
Most cases will say that even if an entity has substance you will look to see if its transactions have substance.
While the Swiss structure moved income to Geneva, Caterpillar had New York-based accounting firm devise a complementary “Bermuda strategy” aimed at returning some cash to the U.S. without paying tax on it. The documents are filed as exhibits to the lawsuit.
Under current law, American companies can defer federal income taxes on most overseas earnings as long as the money remains abroad. Foreign income brought to the U.S. is subject to tax at the 35 percent rate -- with credits for overseas taxes paid. Congress is considering a one-time tax holiday that would reduce the rate to 5.25 percent.
Caterpillar reported total expenses of $3.68 billion for U.S. federal taxes on $12.3 billion in pretax U.S. profit from 2000 through 2009, an effective rate of 30 percent. It reported $2.97 billion for taxes on $14.4 billion of non-U.S. pretax profits, a rate of 20.6 percent on foreign income.
Overall, including U.S. state taxes, Caterpillar reported an effective tax rate for the period of 26 percent, or $6.9 billion on pre-tax profits of $26.8 billion, based on its disclosures.
Caterpillar’s U.S. federal income tax return for 2003 reflects far lower numbers: $4,667 in tax on taxable income of $18 million and revenue of $22.8 billion. The Caterpillar spokesman, declined to comment on the 2003 return, which was filed as an exhibit to Schlicksup’s complaint.
Schlicksup, a lawyer and a certified public accountant with a master’s degree in tax law, tried for two years, beginning in 2007, to persuade senior Caterpillar http://www.blogger.com/img/blank.gifexecutives that the Swiss plan might violate U.S. law, according to e-mails filed as evidence in his suit. A Caterpillar employee since 1992, he became concerned after researching the economic substance issue in late 2006, he said in a declaration filed with his suit.
His bosses, Caterpillar’s general counsel and its chief compliance and ethics training officers, rejected his concerns as unfounded, e-mails show.
In subsequent e-mails to various executives, Schlicksup wrote that Caterpillar had not set aside enough cash in the event the IRS disallowed the Swiss strategy. In response, the company’s senior corporate counsel, told him that executives had reviewed his concerns. They were satisfied that the matter was adequately addressed and handled appropriately, and that this matter is therefore closed.
Ultimately Schlicksup summarized his concerns in a 15-page May 2008 memo to Caterpillar’s chief executive officer. He warned of what he called serious shareholder fraud involving overstated income, according to the declaration he filed in court in December 2009.
The executives did not respond, according to his complaint. Then, in August of 2008, a human resources executive told Schlicksup that he could transfer to Caterpillar’s information technology division or leave the company, his complaint says.
The new job involved overseeing implementation of a computer system he knew nothing about, his suit claims, for less pay and a smaller bonus target. Schlicksup called it a demotion. After a meeting with Caterpillar’s human resources department, his pay was restored, according to the lawsuit, though he says the transfer out of his area of expertise makes him unlikely to be promoted.
In September 2008, Schlicksup’s new boss, Chief Information Officer, gave him a draft agreement to restore his compensation, according to the lawsuit. It required Schlicksup to stop accusing Caterpillar of any unlawful, unethical or improper conduct, according to a copy of the draft filed as an exhibit in the suit. Caterpillar alleges that they do business ethics training. Schlicksup demanded changes, including a payment to make up for lost promotions. The email response was that the company was no longer pursuing the agreement. Schlicksup remains employed by Caterpillar’s information services division.
The company said it hadn’t retaliated against Schlicksup.