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.