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Walgreen retreats from plan to move tax domicile abroad

By Kevin Drawbaugh and Olivia Oran

WASHINGTON/NEW YORK (Reuters) - U.S. retailer Walgreen Co has backed away from a plan to reincorporate abroad to cut its U.S. tax bill, while the Obama administration said it was considering steps to curb such corporate tax domicile-shifting deals.

Walgreen, the operator of the largest U.S. pharmacy chain, will buy the 55 percent it does not already own of European rival Alliance Boots , but the U.S. company will not use the deal to move its tax domicile overseas, said a person familiar with the matter.

Walgreen issued a statement late on Tuesday saying it would announce "several updates" on Alliance Boots at 6 a.m. Eastern time (1000 GMT) on Wednesday, followed by a conference call with management at 8 a.m. ET. The company said the updates would cover "the transaction's timing and structure."

Walgreen's retreat will be the third major possible "inversion" deal involving a major company to collapse in recent months amid controversy, underscoring the complexity and heightened political sensitivity in the United States of these transactions.

Walgreen had been under pressure from investors to do such a deal as part of its buyout of Alliance Boots so the U.S. retailer's tax domicile could be moved to Switzerland or Britain.

But the company also faced criticism from Democratic politicians, including the senior U.S. senator from its home state, Richard Durbin.

"I believe you will find that your customers are deeply patriotic and will not support Walgreen’s decision to turn its back on the United States," Durbin wrote to Walgreen CEO Gregory Wasson last month. "Nearly all of your $2.5 billion in profits earned last year were from sales to U.S. taxpaying customers.”

In an inversion, a U.S. corporation buys or sets up a foreign company and then moves its tax domicile to that foreign company and its home country, while leaving core business operations in the United States. Doing such a deal ends U.S. taxation of the company's foreign profits and makes it easier for the company to take other tax-cutting steps.

Walgreen shares ended regular trading on Tuesday at $69.12, down 4.4 percent.

"Given Walgreen's physical retail presence in the U.S. we believe Walgreen is somewhat unique relative to recent pharma manufacturer tax inversion deals. Walgreen ability to trim its tax bill may be less substantial relative to other industry tax inversions," wrote Leerink Partners analysts in a note.

"We believe long-term fundamentals are sound and management will likely also provide updated fiscal 2016 guidance ... which could help offset potential investor disappointment if a tax inversion is abandoned," they added.

A spokeswoman for Alliance Boots declined to comment.

TREASURY WEIGHS OPTIONS

Separately, the Obama administration said on Tuesday it was considering administrative actions to discourage inversions, given the failure of Congress to address the issue.

"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," a Treasury Department spokesperson said in an email.

The spokesperson added there were limits to what Treasury could do without action by Congress, and that "legislation is the only way to fully address inversions."

Three prominent Democratic senators on Tuesday urged President Barack Obama to use his executive authority to reduce or eliminate tax breaks for companies that invert.

Nine inversion deals have been agreed to this year by U.S. companies ranging from banana distributor Chiquita Brands International Inc to drugmaker AbbVie Inc and more are being considered. The transactions are occurring at a record pace since the first inversion three decades ago.

But two large inversions recently collapsed: one involved U.S. drugmaker Pfizer Inc ; and the other, U.S. advertising company Omnicom Group Inc . Both had targeted European rivals for acquisition, with a tax domicile move abroad included in their plans, but the deals unraveled.

SENATORS URGE ACTION

Senator Durbin, the second-ranking Senate Democrat, along with Senators Jack Reed and Elizabeth Warren, said immediate action was needed to stem these transactions, citing concerns about fairness and the eroding U.S. corporate tax base.

Durbin, who is personally close to Obama, is from Illinois and had publicly urged Walgreen not to go through with an inversion. Obama himself formerly was a senator for Illinois.

In his letter to Walgreen last month, Durbin closed with a jab at the firm’s advertising tagline, Durbin asked: "Is “the corner of happy and healthy” somewhere in the Swiss Alps?”

Treasury Secretary Jack Lew has publicly questioned the patriotism of companies that do inversions. "We are looking at a very long list of possible ways to address the issue,” he said in an interview with The New York Times on Tuesday.

Alliance Boots has itself come under attack in Britain for cutting its taxes through its Swiss domicile, with trade union Unite noting it has lowered its UK tax bill by over 1 billion pounds since 2007 although about 40 percent of its total revenues come from British taxpayers.

Inversions are still rare but are becoming more common. Of the roughly 50 inversion deals done since 1983, about 40 percent have been completed since 2009 and more are being finalized, with many others said to be in the planning stages.

Inversion deals are legal, and company executives who arrange them say they are only trying to minimize the amount of taxes the company pays, as investors expect them to do.

UK-based Sky News was first to report that Walgreen had decided not to proceed with its planned reincorporation.

(Additional reporting by Esha Vaish and Ramkumar Iyer in Bangalore; Greg Roumeliotis in New York; David Lawder, Mark Felsenthal and Jason lange in Washington and Emma Thomasson in Berlin; Editing by Steve Orlofsky and Mark Potter)

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