Corporations now have to weigh much more than just their tax bill when deciding whether to shift their legal addresses overseas.
President Obama this week vowed to curb the influx of companies buying smaller foreign competitors to slash their tax bill through a corporate “inversion,” just the latest sign that an issue little-known outside the tax world a few short months ago has evolved into potent political fodder.
The drugstore giant Walgreen was perhaps the best-known company considering reincorporating abroad. But on Wednesday, it announced it would remain American even as it followed through on purchasing a foreign competitor.
The chain acknowledged the outside political debate played a role in its decision, underscoring how politics is affecting corporate board discussions.
While the White House argues corporate inversions are unpatriotic, publicly-traded corporations must balance those concerns with shareholder demands. Walgreen’s stock nosedived after it decided to keep its headquarters in the United States.
One congressional Democratic aide said scrutiny has reached a point at which well-known brands have decided it’s not in their interest in invert.
“From here, I think the pressure’s only getting more intense,” the aide said.
While Obama said executive branch action could at least discourage inversions, both he and Treasury Secretary Jack Lew have said that only Congress can truly put an end to the practice.
Former Treasury officials have said they could limit the tax breaks that inverted companies get for interest expenses, effectively reducing the appeal of such a move.
But they argue a broader revamp of the tax code is the best way to deal with the matter.
In the interim, the White House has urged Congress to pass legislation that would basically stop companies from being able to buy smaller foreign competitors and renounce their U.S. citizenship.
Democrats acknowledge that they believe the issue fits perfectly with their pitch on economic fairness, and that it’s no accident the president’s rhetoric intensified just months before a midterm election.
But it’s also clear that just Washington’s renewed interest in inversions has companies on high alert.
Walgreens specifically said its “unique role as an iconic American consumer retail company” played a big part in its decision to stay in the Chicago area. It also noted that a big chunk of its revenue comes from “government-funded reimbursement programs.”
On top of that, Edward Kleinbard, formerly of the Joint Committee on Taxation, said corporations had to be worried about angering powerful officials that have previously been in their corner. Senate Majority Whip Dick Durbin (D-Ill.), for instance, repeatedly called out Walgreen for even considering heading offshore.
“Firms need cordial relationships with their lawmakers across a wide range of issue,” said Kleinbard, now at the University of Southern California. “I would, frankly, worry more about my relationships with my lawmakers than I would public rage in the streets.”
Republicans agree that the deals are a problem, but say the real culprit isn’t the companies. Instead, they argue it’s the outdated tax code, and that the proposed Democratic fix could make it easier for foreign companies to take over domestic businesses.
GOP lawmakers also have yet to be moved by Obama’s entrance into the inversions debate, and make it clear they believe that politics is driving the Democratic message.
The inversion deals that have come under fire this year are more complex than those targeted by Congress in 2004, the last time it passed legislation.
Before that law, a company looking to escape a U.S. tax bill could flee to tax-friendly jurisdictions like the Cayman Islands with little more than a change in their mailbox, as Sen. Chuck Grassley (R-Iowa) put it.
With those deals now illegal, John Harrington, a former international tax counsel at Treasury, said political leaders have shifted their focus to moves like those considered by Walgreen.
“These types of transactions were always there, but just weren’t as egregious as the other ones,” said Harrington, now a partner at Dentons. “What was considered egregious has shifted.”
Now, a company seeking to reincorporate in another country has to find a more significant merger partner – in other words, it must buy a bona fide business.
“That’s not a trivial transaction,” Kleinbard said.
The pharmaceutical company AbbVie, in announcing its merger with the Jersey-based Shire, noted that the new corporation would make a more diverse array of drugs.
Still, companies considering inversions also saw their stocks drop this week after Obama’s announcement. And they must consider the tax repercussions for their own shareholders.
The proposed Democratic solutions would be retroactive to May, forcing corporations to take into account whether an inversion won’t seem like such a good deal in a few months.
The pharmaceutical company Mylan – whose chief executive, Heather Bresch, is the daughter of Sen. Joe Manchin (D-W.Va.) – has shown no regrets for its decision to reincorporate abroad.
And now, even CVS Caremark – a strong retail brand like Walgreen – has said it’s reluctantly looked into moving outside the U.S.
But the renewed interest in Washington means that the next corporation considering a move needs to be aware that the spotlight is heating up.
“We’re going to get to a point where people are getting kind of panicked,” said Wamhoff. “What’s the next big corporation that’s going to get everybody up in arms?”