Walgreens portrays itself as America’s pharmacy, located in communities across the country “at the corner of happy & healthy.” But if a group of hedge funds gets its way, Walgreens could become a “foreign” corporation for tax purposes – operating at the intersection of lawful and shameful.

Walgreens Sign: Walgreens Open 24 Hours, Drive Thru Pharmacy. Digital Prints 29cents. We Have Chicken Poop $3.99 ea or 3/$10.00

“America’s pharmacy” or offshore shell game?

America’s sixth largest retailer, Walgreens had $67 billion in sales (as of 2012), the vast majority of which are in the U.S. Federal laws that are supposed to prevent corporations from dodging taxes on their U.S. profits are very weak, and as we reported in a recent WI Budget Project Blog post, the use of foreign tax havens to evade federal and state taxes is a growing problem.

A recent blog post by Citizens for Tax Justice (CTJ) explains that some Walgreens shareholders want to exploit the loopholes in those laws to substantially reduce the company’s U.S. taxes. Walgreens is allowed to change its tax status if at least 20% of its shares are in foreign hands. (News reports Tuesday said Pfizer might also become a foreign company for tax purposes.)

Of course, we don’t know yet whether the hedge funds pushing for this tax avoidance scheme will prevail. Apparently Walgreens management has reservations about the idea – worried that becoming a foreign corporation to shelter profits overseas has political risks and will alienate a lot of loyal Walgreens customers – like me.

Alarmed as I am that stockholders would push this tax avoidance strategy, my beef isn’t primarily with them; it’s with lawmakers who stand by while a growing number of very profitable American corporations exploit loopholes in the tax code to avoid paying their fair share of taxes on their U.S. profits. Unless or until Congress and the states act, the large multinational corporations that have the capacity to exploit tax loopholes will continue to be under pressure to maximize profits and the returns for their stockholders by hiding profits offshore.

The CTJ blog post explains that President Obama’s most recent budget plan would make several changes to tighten the loopholes. For example, “a company that results from the merger of a U.S. corporation and a foreign corporation will be taxed as an American company if more than half its voting stock is owned by shareholders of the original U.S. corporation.” Another part of the president’s proposal would mean that a merged company would be taxed as an American corporation if it has substantial business in the U.S. and is managed and controlled in the U.S., regardless of how much of its stock is in foreign hands. In addition, the President’s budget would make it more difficult for all U.S. corporations to hide profits in foreign tax havens.

A report issued last week by WISPIRG explains how Wisconsin could save an estimated $28.8 million by enacting proposed legislation that would prevent corporations from evading income taxes on profits that they move offshore.  The WISPIRG report examines the tradeoffs faced by other businesses and Wisconsin taxpayers when large multinational companies are allowed to exploit the tax code and evade the taxes they would otherwise owe.

All of these loopholes should be closed because corporations like Walgreens need to pay their fair share of state and federal taxes. In the meantime, we should keep a close eye on what Walgreens’ management decides. If it chooses to evade income taxes by becoming a foreign corporation, I suspect that I wouldn’t be the only person who would take my business to a pharmacy operating on a happier and fiscally healthier corner of our community.

Photo by Fred Miller released under a Creative Commons No Derivatives license.