Wal-Mart Claims Puerto Rico Tax Would Cut Revenues

Wal-Mart Stores Inc. is expected to wrap up its arguments today in its suit against the Commonwealth of Puerto Rico for what it alleges is an unconstitutional tax.

Puerto Rico passed legislation last spring called Act 72, which raises taxes on merchandise purchased from companies outside of Puerto Rico. It only applies to taxpayers with revenues over $2.75 billion and in Puerto Rico that is only one company – Wal-Mart.

Wal-Mart would have to pay a 6.5 percent tax on goods imported to the island, an increase from the previous 2 percent tax. According to court documents, Wal-Mart believes that the tax would cut its net revenue by 91 percent, but in court said it would reduce its net revenues by 114 percent, essentially making the company lose money and put it out of business there. Wal-Mart said that because Puerto Rico is a commonwealth country, the merchandise isn’t coming from outside the country and therefore the tax is unconstitutional.

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Gil Hall of PR News Roundup has attended the trial and said Puerto Rico believes Wal-Mart can afford to pay the tax and doesn’t buy that it’s a death sentence. The country is struggling to make its debt payments and needs the money desperately. The tax could be short-sighted as Wal-Mart is the island’s largest employer with 14,300 people working for the company and recently said it would be closing seven stores in Puerto Rico.

Puerto Rico wanted the case to happen in lower courts, but Wal-Mart believed it couldn’t get a quick resolution in the country’s court system. Wal-Mart wants a speedy answer because it feels if it pays the tax now, but then the tax gets ruled unconstitutional, Puerto Rico won’t be able to pay the money back.

That’s what most of the case has centered on — the financial state of Puerto Rico. According to Treasury Secretary Juan Zaragoza, as reported in PR News Roundup, the country is insolvent and out of cash. It wants to use the Wal-Mart tax revenue to pay for essential services. It is also just now processing 2013 tax returns.

Wal-Mart lawyers asked Zaragoza whether the tax proposals were made purely to raise revenues and he said, “That’s right.” Which means it wasn’t meant to deter abuse of transfer tax pricing.