Wal-Mart is using a network of undisclosed operations in overseas tax havens to avoid paying U.S. taxes, alleges a report by the Americans for Tax Fairness and the United Food and Commercial Workers International Union.
The report, “The Wal-Mart Web: How the world’s biggest corporation secretly uses tax havens to dodge taxes,” claims that the retailer has built a network of 78 subsidiaries and branches in 15 overseas tax havens to minimize foreign taxes where it has operations and avoid U.S. taxes on those foreign earnings. The report, published Wednesday, said 90 percent of Wal-Mart’s overseas assets are owned by subsidiaries in Luxembourg and the Netherlands.
“The Wal-Mart Web” was researched by the Americans for Tax Fairness and the union, which supports the Organization for Respect at Wal-Mart, a group that campaigns for wage increases and more predictable schedules for sales associates.
“This is the same union-supported group that regularly issues similar, flawed reports on Wal-Mart to promote their agenda rather than the facts,” the retailer said. “This latest report includes incomplete, erroneous information designed to mislead readers.”
According to Americans for Tax Fairness, the Wal-Mart subsidiaries have remained invisible because the company doesn’t list them in its annual 10-K filings with the U.S. Securities and Exchange Commission.
A Wal-Mart spokesman disagreed, saying, “We disclose the significant subsidiaries of the corporation in the company’s 10-K, which is compliant with SEC regulations.”
According to the report, Wal-Mart has 22 shell companies in Luxembourg and transferred ownership of more than $45 billion in assets to subsidiaries there in 2011. Wal-Mart reported paying less than 1 percent in taxes to Luxembourg on profits of $1.3 billion from 2010 to 2103.
Wal-Mart generates $1.5 billion worth of tax deductions in Luxembourg each year by making “phantom interest payments to its global parent, using a hybrid loan that makes the income disappear for tax purposes in the U.S. and in Luxembourg,” the report said.
While Luxembourg has long been the tax haven of choice for many multinational corporations, under pressure from the G-20, Luxembourg in January ended its practice of bank secrecy and there’s a European Union effort afoot to close loopholes that have driven corporate tax rates down.
According to the report, Wal-Mart’s tax-haven subsidiaries in 2014 gave U.S. affiliates access to $2.4 billion in foreign earnings through low-interest and short-term loans.
The report claims that Wal-Mart is using well-known strategies to avoid international taxes such as intercompany debt, which lets it avoid taxes overseas by stripping earnings out of higher-tax countries. Wal-Mart allegedly does this by taking out intercompany loans and paying interest to itself in tax havens where the interest income is taxed lightly or not at all.
The Wal-Mart spokesman defended the retailer’s tax payment record. “Wal-Mart paid $6.2 billion in U.S. federal corporate income tax last year, nearly 2 percent of all corporate income tax collected by the U.S. Treasury,” he said. “Wal-Mart also pays over $10 billion in payroll taxes for its 1.3 million U.S. associates. In addition, Wal-Mart paid $3.3 billion in property tax, state income tax, franchise tax and other state taxes.
“Wal-Mart also collected and remitted over $14 billion in state and local sales taxes, helping fund education, public safety, and infrastructure improvements in the communities where we operate. Wal-Mart has processes in place to comply with applicable SEC and IRS rules, as well as the tax laws of each country where we operate and we maintain transparency with the IRS via real-time disclosure of our business transactions and corporate structure,” he continued.
The report urges the SEC and IRS to take action, asking the former to require Wal-Mart to make public a complete list of its business entities, and the latter to audit Wal-Mart’s use of subsidiaries in tax havens. It also said the IRS should analyze Wal-Mart’s use of short-term offshore loans to fund some of its U.S. operations without paying repatriation taxes and its deposit of offshore cash in U.S. financial institutions to determine whether Wal-Mart has been improperly avoiding U.S. tax.
The European Commission should investigate whether Luxembourg has been providing Wal-Mart with sweetheart tax deals equivalent to illegal state aid,” the report said.
“The report insinuates that the company would benefit from a ‘deemed repatriation’ proposal under consideration by some in Washington,” the Wal-Mart spokesman said. “In fact, because much of the company’s unremitted earnings overseas have been invested into physical assets like stores, distribution centers and equipment in other markets around the world, the company would unlikely benefit from such a proposal. More likely, it would represent a tax increase as the company would have tax due without the benefit of repatriating funds to the U.S. due to our investments in physical assets that are not liquid.
“Just as the company uses funds generated from the U.S. market to continue to invest in stores, wages and growth in the U.S., we keep a large portion of foreign earnings in international markets where they are reinvested for growth,” the Wal-Mart spokesman said. “Regardless of where the foreign earnings are held, under the current law, they are not subject to U.S. tax until they are repatriated. Even so, and even with non-U.S. operations comprising nearly 30 percent of Wal-Mart’s revenue, Wal-Mart had an effective tax rate of approximately 32 percent over the past three years.”