Tag Archives: Zug

So Why is Walgreens Moving to Switzerland? (And What Can We Do about It?)

The other day, a petition from Campaign for America’s Future ended up in my in-box. Its subject line read: “Why is Walgreens Moving to Switzerland?” Of course, Walgreens is not moving to Switzerland. My Walgreens still will by around the corner from my house. And most corporate jobs will remain in Chicago.  The first line of the e-mail reads: “Walgreens is an American success story.  Or, at least, they used to be.” Wrong again: it still is, and will remain so even after Walgreens moves its corporate headquarters to Switzerland. It just will not pay taxes in the US anymore. But that, too, is very American. Ever since Ronald Reagan declared the government the enemy of the people, paying taxes no longer is a civic virtue. Avoiding taxation altogether is considered smart because the money would only serve to bloat the government.

The planned move by Walgreens was precipitated by its merger with Alliance Boots, a British drugstore chain. Alliance Boots moved its corporate headquarters to Zug, Switzerland, in 2008 which caused the very same discussion about corporate citizenship in Britain. Alliance Boots never had more than a mailbox in Zug. According to The Guardian, the move comes at a cost of £100 million to the British taxpayer every year. In 2013, the company headquarters were moved to Bern as Alliance Boots already had operations there. While Zug is the quintessential corporate tax haven, the move to Bern, which was missed by Bloomberg News, does little to change the story. A move to Switzerland by the Walgreen Corporation would have similar benefits. A few weeks ago, analysts from UBS, a global bank based in Switzerland, claimed that stocks in the Walgreen Corporation would rise 75 per cent if corporate headquarters were to be moved to Switzerland.

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Modest multi-party office building at Baarerstrasse 94 in Zug. Alliance Boots was based here until 2013.

Clearly, Walgreens does not want you to read this. In 1904, Charles Walgreen traveled from his small-town home in Dixon, Illinois, to Chicago and opened a pharmacy and soda fountain. It is the quintessential American success story, but today’s corporation has little to do with its humble beginnings. Walgreens want you to believe that they are an American company that pays their taxes, that they are being a good corporate American citizen, and that they live up to their iconic status as a quintessential American corporation. In a wicked way, of course, they are: like so many other American corporations, they are moving their corporate headquarters offshore.

Large corporations are de-nationalized entities which nimbly navigate the global financial and fiscal system while maintaining the fiction of national citizenship for public consumption. Two years ago, Gregory D. Wasson, the chief executive of Walgreen Corporation, sought tax breaks from the state of Illinois the company is still based. At that point, he stated: “We are proud of our Illinois heritage. Just as our stores and pharmacies are health and daily living anchors for the communities we serve, we as a company are now recommitted to serving as an economic anchor for northeastern Illinois.” At the time Wasson made this statement, the merger with Alliance Boots was essentially a done deal.

Walgreens is not the first and probably not the last US corporation to move their headquarters overseas for tax reasons. But Walgreens is different in that it is part of daily life in the US. My Walgreens is not just a pharmacy, I go there as well when I am out of dish detergent or beer. When Transocean, the owner of the Deepwater Horizon platform which caused the huge oil spill in the Gulf of Mexico in 2010, moved its corporate mailbox from Houston to Zug in 2008, nobody took notice. But Walgreens lives off he daily contact with American consumers, and in that it is seen as a quintessentially American brand that cannot be relocated so easily. And herein lies the chance to create public pressure not just to prevent Walgreens from moving to Switzlerland but to expose the fraudulent global scheme of corporate taxation.

So what does Campaign for America’s Future want you to do about this? They want you to send them ten bucks so they can “expose this scam, pressure Walgreens to do the right thing, and shut down the tax loophole that allows this to happen.” You can also sign their “Tell Walgreens: Don’t Desert America” petition. While I cannot argue against closing tax loopholes, this approach is merely cosmetic.

In 1998, the OECD published a report entitled Harmful Tax Competition: An Emerging Global Issue which arrives at the stunningly simple analysis: “Where activities are not in some way proportional to the investment undertaken or income generated, this may indicate a harmful tax practice.” Ultimately, the OECD had to abandon its efforts to develop non-abusive global taxation standards due to resistance from the wealthiest countries. The OECD report makes it clear that it is unethical for Swiss cantons (and other entities) to allow foreign corporations to incorporate and that it is harmful for tax jurisdictions where the actual economic activity of these corporations takes place. This practice particularly hurts developing countries, as Nicholas Shaxson argues in Treasure Islands (2012), that as a consequence become more dependent on foreign aid. Yet, fighting individual predatory jurisdictions, like many Swiss cantons, would only be marginally productive as corporations easily can move their mailbox to a different, equally beneficial jurisdiction.

One of the OECD recommendations was that a global standard should be established by which corporations should be taxed where their economic activity is taking place. We need to vigorously push for this standard, and we need to seek a fundamental change in how corporations are taxed globally. Corporations need to be taxed where they are producing goods and services and where they are using the infrastructure, not where they are having their corporate headquarters, i.e. their mailboxes. Such mailbox headquarters create a windfall for the host tax jurisdictions which in turn allows them to drop the corporate tax rates even more to attract even more corporate mailboxes. The Swiss canton of Zug is a textbook example for that.

The only real solution, ultimately, is to end tax competition between jurisdictions. In competitive tax environments, corporations win and taxpayers lose. Corporations and their lawyers always can move more nimbly than politicians and the polities they represent. Corporations can move their mailboxes as they please, pick where they pay taxes, and play tax jurisdictions against each other. Tax jurisdictions cannot move their citizens or their infrastructures. Unless we change the very system of how corporations are taxed, the Walgreens of this world will always have their way and citizens will lose out.

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One of many mailboxes at Baarerstrasse 94 in Zug: Künzi Treuhand AG. About 50 corporations and business groups receive their mail here–meaning that this is where they are legally incorporated. One of their advertised specialties: helping foreign corporations set up and manage corporate headquarters here. This is big business, and there are many such companies in Zug.

 

Marc Rich and Switzerland: An Uneasy Relationship

By sheer coincidence, I arrived in Zug, Switzerland, a couple of days after the passing of Marc Rich (1934-2013) who was one of the world’s foremost commodities traders. It just so happens that this is the city where in 1974 Marc Rich and friends founded Marc Rich + Co AG which specialized in commodities trading. It is no accident that Rich set up his company in Zug which is a business-friendly tax haven cloaked in secrecy, located in a small country that specializes in tax shelters and bank secrecy. Rich sold his company in 1994 which then was renamed Glencore and today is one of the biggest traders in commodities–still based in Zug.

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Zug, Switzerland. Humans: 25,000. Corporations: 30,000.

Marc Rich traded with anyone, and he pursued commodities even in countries with very difficult political situations where other traders stayed away. His company also traded with countries under US or international sanctions, such as Cuba, Iran, and South Africa during Apartheid, and with ruthless dictators like Pinochet, Ceausescu, Qaddafi, and others. A congressional investigation revealed that Rich for instance delivered Soviet and Iranian oil to South Africa and traded uranium from Namibia, which then was a South African protectorate, back to the Soviet Union in return. The Shipping Research Bureau in Amsterdam documented 149 oil deliveries to South Africa set up by Marc Rich between 1979 and 1993 in violation of the embargo. These oil deliveries were vital as oil was the only major raw material South Africa did not possess on its own.

Ken Silverstein in his well-researched 2012 profile of Marc Rich in Foreign Policy states that “the real secret to Glencore’s success is operating in markets that scare off more risk-averse companies that fear running afoul of corporate governance laws in the United States and the European Union.” Daniel Ammann, who wrote a Marc Rich biography entitled The King of Oil, in a 2010 interview with Reuters stated that Rich “went where others feared to tread – geographically and morally.” According to CNN Money, Rich was “one of the world’s most famous white-collar criminals,” and the Financial Times more bluntly called Rich a “buccaneering oil trader.”

Marc Rich was indicted in the US in 1983 on more than 50 counts of fraud, racketeering, evading income taxes, and breaking US and UN trade embargoes. At the time, he was considered the biggest tax evader in US history, and dealing with outlaw regimes had turned into his specialty. The FBI put Marc Rich on its most wanted list. In response, Rich renounced his US citizenship in 1984 and hunkered down in Switzerland which proved to be a reliable place of exile. Rich maintained his primary residence in Switzerland, first in Zug and then in nearby Meggen, until his death earlier this week. His exile only ended when President Bill Clinton pardoned Marc Rich on his last day in office on January 20, 2001–an act that left a stain on Clinton’s legacy. The record shows that influential politicians of another small state, Israel, had lobbied on Rich’s behalf, including Ehud Barak and Schimon Peres. In spite of Clinton’s pardon, Rich never dared to return to the United States out of fear that US officials would file charges not covered by the pardon.

But the question of interest here is why Switzerland offered Marc Rich a safe haven during his years as a refugee from the law. I see four major factors. Perhaps most importantly, Switzerland makes a distinction between tax evasion and tax fraud. Only tax fraud is considered a felony, while tax evasion, no matter the amount and degree of criminal intent, remains a minor civil offense not unlike a parking ticket. While most of the civilized world sees this as an artificial and self-serving distinction, it prevented Marc Rich from being extradited to the United States. This issue, by the way, is at the core of current taxation conflicts between Switzerland and the outside world, most notably the United States and the European Union. This quirk in Swiss tax law, in conjunction with bank secrecy laws, provides legal cover for tax evaders who hold accounts in Switzerland but whose tax home is elsewhere.

A second factor is the Swiss policy of absolute neutrality which the country implemented after WW II and was only softened when Switzerland joined the UN in 2002. In this strict interpretation of the 1907 Hague Convention on the “Rights and Duties of Neutral Powers,” Switzerland abstained from international actions against other countries, even trade embargoes. Therefore, Switzerland continued to trade with the Apartheid regime in South Africa , including the sale of war materials. Swiss corporations thus were free to engage in trade with countries like South Africa or Iran. Switzerland offered a safe home base to Marc Rich who had free hand to trade commodities with renegade countries like South Africa and thus to circumvent UN trade sanctions and embargoes and profit from them.

The third factor is that Marc Rich was good for business in Zug. Marc Rich and his corporation brought wealth into the community, and he enjoyed the protection of local politicians in return, particularly during the 1980s when he was a fugitive. Ties to then Zug mayor Walther A. Hegglin and to Georg Stucky, the cantonal minister of finance from 1975 to 1990, appear to have been particularly close. Hegglin allegedly coined the saying, “Was gut ist für Marc Rich, ist auch gut für Zug.” (What is good for Marc Rich is good for Zug as well.) In an interview with the Neue Luzerner Zeitung this week, Hegglin stated, “We owed a lot to Marc Rich,” explaining that tax revenue from Rich’s company created a windfall for the city. Stucky served on the board of the Marc Rich Group and of some of his charitable foundations from the early 1990s onward and has remained a close business associate until now–even though he simultaneously was a member of the National Council (lower chamber of the Swiss national parliament) from 1979 to 1999. In an Associated Press article by Clare Nallis from 2001 he is quoted as saying about Rich: “The whole picture of him has been completely distorted. He is an extremely generous man and he’s done an incredible amount of good.”

The fourth factor is that Marc Rich after his 1983 indictment in the US stepped up his philanthropic efforts which benefited Switzerland, other European countries, and Israel. According to his own official biography, his foundations have donated over $150’000’000 to various charitable causes. The Swiss Foundation for the Doron Prize, founded in 1986, recognizes Swiss “individuals and institutions that devote time, energy and/or financial resources to the fields of social welfare, education, arts and culture, and science.”  The Marc Rich Foundation for Education, Culture and Welfare, chartered in 1991, seeks to promote education, art, culture and scientific research in Europe and Israel. And in 1989, Rich donated his extensive photography collection to the Kunsthaus Zürich, the premier art museum in Switzerland. Furthermore, he was an important sponsor of the EVZ, the local hockey club and one of the top teams in Switzerland. Through his philanthropy and a public relations campaign, “he achieved a level of social respectability in Swiss society not usually afforded to those facing 325 years in an American prison if the feds had had their way,” as the obituary in The Economist cheekily points out.

The story of Marc Rich shows how easily a wealthy renegade can sway the public opinion and achieve respectability by cleverly catering to small state sensibilities. But even in Zug, Marc Rich was not without detractors. Josef “Jo” Lang of the Green-Alternative movement created a political career out of his opposition to Marc Rich and his business practices, as he told the Zurich daily Tages-Anzeiger this week, and his party tends to garner around 20 per cent of the popular vote. In a small state, colorful and controversial figures like Marc Rich quickly can rise to a level of notoriety not seen in large states, but this also true for their equally colorful detractors.