In a twist on economic globalization less obvious than moving factories overseas, a small but growing number of corporations have relocated headquarters to Europe to escape the 35 percent tax on U.S. profits, the highest in the developing world.
Aon Corp., one of Chicago's most prominent businesses, shifted its corporate home to London in 2012. Last month, Deerfield-based Horizon Pharma Inc. said it would move its headquarters to Ireland as part of a merger.
But these types of tax deals may be put to the test.
Walgreen Co., the nation's largest drugstore chain, is under pressure from some shareholders to move its headquarters to Europe, where it owns nearly half of Swiss-based pharmacy giant Alliance Boots.
Deerfield-based Walgreen has called Illinois home for all its 113 years.
Though a move would make financial sense for Walgreen and its investors, it's an executive decision fraught with political risk for a company as high profile as the pharmacy chain, analysts said Monday after news leaked that Walgreen and investors discussed the possibility.
Walgreen plays an integral role in the U.S. health care system, dispensing drugs to millions of consumers through its more than 8,000 stores. A significant portion of its $72 billion in annual sales comes from Medicare, the federal government's insurance program for the elderly.
Shifting its profits overseas to avoid payment of U.S. taxes could make Walgreen an easy target for politicians and a public keenly attuned to issues of fairness and income inequality.
"It is hard to imagine a company with the majority of its business in the United States not being headquartered in the United States; it doesn't make much sense," said Andrew Wolf, an analyst with BB&T Capital Markets. "If they were to do that now, the political fallout would be very harsh."
Though Walgreen has given no indication it's about to make a decision, relocation momentum is building in a global economy that has weakened the ties that bind a business to a community. First, factories and jobs became untethered. Advancements in technology now give companies more options on where to maintain their headquarters by making it easier to communicate and move products anywhere in the world.
The U.S. tax code also is fueling the trend, according to companies and business groups. Paul Bisaro, chief executive officer of Actavis Inc., a New Jersey-based pharmaceutical company, has argued that high corporate tax rates have put his company and others at a competitive disadvantage in the global marketplace.
Last year, Actavis acquired Ireland's Warner Chilcott for about $5 billion. The deal brought Actavis a portfolio of brand-name women's health drugs, and also allowed it to complete a so-called tax inversion, relocating its headquarters to Ireland, which has a corporate tax rate of 12.5 percent.
This and other deals have allowed Actavis to cut its tax rate to 17 percent from 37 percent, according to published reports.
The tax-saving mergers are legal as long as the acquiring, U.S.-based company gives up at least 20 percent of its ownership interest to the foreign target, said Robert Willens, a New York-based tax and accounting consultant. Shifting headquarters overseas tends to have very little effect on employee head count because the tax code does not require executives to relocate to the new corporate domicile.
Since Aon, a global insurance brokerage, had substantial business operations in London, the company did not have to acquire a foreign business to complete its tax inversion. Aon said it moved to the United Kingdom to gain greater access to emerging markets in Europe and Asia and to be closer to the Lloyd's of London insurance market.
The shift lowered the company's tax rate to 25.4 percent last year from 27.3 percent in 2011, said Meyer Shields, managing director at investment bank Keefe, Bruyette & Woods. Since Aon inverted, it also has more easily used the cash it generates from non-U.S. operations to pay for stock buybacks and a dividend increase.
Such deals have grown in popularity in recent years, fueled be a me-too mentality, said Stuart Webber, a professor and chair of business leadership and management at Trinity Lutheran College in Everett, Wash.
"As one company does it and lowers its tax rate, its competitors notice and feel they have to take the same action to keep up with their competitors," Webber said.
For Walgreen, a relocation could significantly reduce its total taxes. In its fiscal 2013, Walgreen's average tax rate was 37.1 percent, said Vishnu Lekraj, a senior health care analyst with Morningstar. He estimated the rate in Europe would be about 20 percent.
The push for Walgreen to relocate was made Friday at a private meeting in Paris between company executives and a handful of large shareholders that owns about 5 percent of the company's stock, the Financial Times reported. Walgreen confirmed that its executives were overseas last week but would not detail the content of their business dealings or meetings.
The company's chief executive, Greg Wasson, has previously dismissed the idea. In a conference call with investors last month he said the company had no plans for an inversion.
But on Monday, Walgreen softened its tone. Though spokesman Jim Graham would not say if the company was considering moving its headquarters to Europe, he said it regularly meets with investors and "always welcome(s) their input."
"Our focus is always on analyzing and doing what is in the best long-term interest of our company and its shareholders, and when we have something more definitive to announce about our future structure and strategies, we will do so," Graham said in a statement.
Walgreen shares rose 2.2 percent Monday to close at $65.67.
Aggressive corporate tax-reduction strategies have become a public policy issue because substantial tax revenues are lost.
Caterpillar Inc. was the focus of a Senate hearing this month for routing profits from its foreign replacement parts business through an affiliate in Switzerland. The maneuver has saved the Peoria company $2.4 billion in U.S. taxes since 1999, according to a Senate investigation.
The company said it paid all the taxes it owed, and Sen. Carl Levin, D-Mich., charged that the company was exploiting a "dubious" tax loophole to avoid what it owed at the expense of the American people.
Sen. John McCain, R-Ariz., acknowledged that the high U.S. corporate tax rate was a factor in companies moving overseas and it made "a compelling argument for broader tax reform."
Re-domiciling began in earnest in the late 1980s and early 1990s, when several U.S. firms relocated their headquarters to Bermuda and other tax havens. It's a loophole the government has tried to close several times. Since Aon moved to London, Willens estimates, about 30 U.S. companies have completed tax inversions.
The process is becoming increasingly visible, particularly in light of heated discussions surrounding the Occupy movement, the issue of tax reform and arguments for closing corporate tax loopholes, said Klaus Weber, associate professor of management and organizations at Northwestern University's Kellogg School of Management.
"Who this hurts is the U.S. government and, in the case of Walgreens, Illinois, who basically get less tax revenue," Weber said. "That money instead goes in part to shareholders and in part to the government where it relocated that has lower tax rates."
Tribune reporters Jessica Wohl and Alejandra Cancino contributed.
While it is legal, it's immoral. High taxes (if you can trust those in power) should be paid regardless as they are the engine of infrastructure for America. We are racing to the bottom now because Corporations want all the money and aren't willing to allow their business to benefit anyone else. It used to be just making a profit, now its all about "wealth management". It's beginning to look a lot like France before the Revolution. Time for the guiloutines and tumbrils I guess to illustrate to all those corporations whose going to determine the future.