This Wall Street Journal article describes how Wal-Mart is able to pay about half as much state tax as a typical corporation.
Drucker, Jesse. 2007. "Inside Wal-Mart's Bid To Slash State Taxes." Wall Street Journal (23 October): p. A 1.
"In May 2001, Wal-Mart Stores Inc. issued an appeal to big accounting firms: Find us creative new ways to cut our state tax bills. Ernst & Young LLP swung into action. Senior tax experts at the big accounting firm swapped ideas via email and in a series of meetings. At least one gathering, according to an internal Ernst & Young calendar, took place in Wal-Mart's headquarters in the "Tax Shelter Room"."
"Big companies hardly ever discuss how outside accountants, lawyers and investment bankers help them cut their tax bills. But Ernst & Young's contributions to Wal-Mart's state-tax minimization project are outlined in a raft of documents filed in recent months in North Carolina state court, where the state's attorney general is challenging a Wal-Mart tax-cutting structure involving real-estate investment trusts. The material, which includes company emails and memos, provides a rare window into accountants' role in generating tax-reduction ideas at one major company."
"Companies often assert that tax savings are simply happy byproducts of transactions pursued for other business reasons. But documents from the North Carolina case indicate that Wal-Mart, from the outset, had one primary purpose: cutting its state income taxes. Ernst & Young worked to fulfill that goal. In 2002, for example, the accounting firm delivered a 37-page proposal laying out a smorgasbord of 27 potential tax strategies, most tailored to a particular state's tax code. It described one of them as "a very aggressive strategy with considerable risk."
"Publicly traded companies reduced their federal income taxes by about $12 billion in 2004 through potentially abusive tax transactions, according to Internal Revenue Service data. Some experts say companies save far more than that each year through elaborate tax-cutting maneuvers."
"Wal-Mart's 2001 letter to accounting firms got right to the point. It began: "Wal-Mart is requesting your proposal(s) for professional tax advice and related implementation services in connection with minimization of state income taxes in the following states: Arizona, California, Florida, Illinois, Indiana, Michigan, Minnesota, and Pennsylvania"."
"State income-tax rates for corporations average about 6.9%, and come on top of a federal statutory rate of 35%. Tax rates vary from state to state, and some states have no corporate tax at all on certain income. That provides ample opportunity for so-called tax arbitrage, in which companies allocate expenses and revenues between states in order to minimize taxes owed."
"On average, Wal-Mart has paid taxes at a rate equal to about half of the average statutory state rate over the past decade, according to an analysis of the company's regulatory filings by Standard & Poor's Compustat."
"In the early 1990s, it employed an "intangibles holding company," a unit operating in tax-friendly Delaware into which it transferred ownership of its brand names such as Sam's Club. It then made payments to that unit for use of those brands, deducting them as expenses from its taxable income in other states, according to court records. That strategy fell out of favor after several states successfully challenged Wal-Mart and other companies in court over the maneuver."
"Wal-Mart set aside about $526 million for state and local income taxes last year, not including its substantial property-tax bills, according to the company's financial reports. But its various state tax-cutting strategies seem to have had an impact. On average, Wal-Mart has paid taxes at a rate equal to about half of the average statutory state rate over the past decade, according to an analysis of the company's regulatory filings by Standard & Poor's Compustat."
"After Wal-Mart hired the firm in 1996 ..., an Ernst & Young tax executive urged his team to be discreet, according to a staff memo included in North Carolina court records. "We don't think there is much the state taxing authorities can do to mitigate these savings to Wal-Mart, however some states might attempt something if they had advance notification," he wrote. "We think the best course of action is to keep the project relatively quiet .... there just seems to be too many opportunities for it to get out to the press or financial community and we all know they are difficult to control, particularly when we are dealing with a client as well-known as Wal-Mart"."
"David Bullington, Wal-Mart's vice president for tax policy, said in a deposition that he began feeling pressure to lower the company's effective tax rate after the current chief financial officer, Thomas Schoewe, was hired in 2000. Mr. Schoewe was familiar with "some very sophisticated and aggressive tax planning," Mr. Bullington said, according to a transcript of the deposition, taken by the North Carolina attorney general's office in July. "And he ride herds [sic] on us all the time that we have the world's highest tax rate of any major company"."
"As Ernst & Young worked on its proposals, one high-ranking tax partner sent an email to a colleague addressing a concern often faced by companies: how to describe a tax-driven transaction in a way that won't create problems later on with tax authorities. "You asked if we have a document that details how the tax savings will work, how much they will save .... We really don't have anything like that except for the sales document, partly because we have avoided calling this a 'tax' project, to show that we did not have a tax savings motivation, rather it is a 'domestic restructuring' project," he wrote."
"As for Wal-Mart's "Tax Shelter Room," North Carolina officials asked Mr. Bullington about the odd name. In his deposition, the Wal-Mart vice president said the moniker was "a bit of a pun," stemming from the conference room's use by tax-department employees to conduct safety drills for natural disasters such as tornadoes."
12 comments:
Wow! I thought I'd be the one that brought transfer pricing manipulation to this blog but you beat me to it. A little of this is covered by David Cay Johnston's Perfectly Legal in his chapter called Letters to Switzerland. But that's international. Here you bring up the domestic play. Usually these Delware Intangible Holding Companies only own the trademark and not the other intangibles and the Delaware shell company does not even do the advertising. That the Delaware shell deserves all intangible profits is such a joke but it took the Sherwin-Williams case (thanks to USC's Alan Shapiro) to make an obvious point. And the Big Four reaction? Something like - Sherwin Williams lost for other reasons? Complete and total dorks but they still beat the tax authorities? Something wrong in transfer pricing enforcement.
BTW - the domestic play is small potatoes compared to a new international play when WalMart et al. source goods from China. Google over at Angrybear for Wal Mart and you'll se my post on this (I think I give Max Sawicky a big hat tip).
I could not find your angrybear post. I am a big fan of the Johnston book.
Michael - just provided links to two AB posts on this in my follow-up post here.
Walmart is 'old money'. Of course they know how to avoid taxes, and even paying their own employees!
It's is not so much that WalMart, or any other corporation, knows how to avoid taxation. More to the point, as the WSJ article makes clear, the Treasury Dept and the Atty Generals' offices are obviously trying hard not to see what's going on. The comment from the Ernst and Young execs make it perfectly clear that they know that they are treading on very thin ice and they want know spot light on their deception. It's little more than an absence of oversight by the appropriate regulatory authorities that is at play in this situation. No doubt that upopn retirement, or a change of administration, those same regulators will become executives in thosee very same companies that benefit from their lack of zeal in carrying out their responsibilities.
Whew! Jack lays a major smack down on this White House. AND he offers a possible answer to why the IRS Exam economists can't blow the lid off this bogus transfer pricing manipulation. Maybe their hands are tied?
I'm not too sure that I'd limit the interference to the current Administration. It has been all too obvious that each branch of government, regardless of the party in power or the group making up the Executive Branch, has done as little as possible to control the most flagrant abuse of the tax codes. I'm not an accountant, so I can't list for you the many variations on that theme, but it's getting boring to read about the "discovery" of yet new and more fanciful ways to avert corporate America's tax responsibilities.
The many issues raised on this site and others of similar inclinations continuously find at their core a lack of good government. Every effort is made to protect wealth at the expense of working Americans while at the same time even the most minimal benefit to those workers and citizens continues to be attacked as profligate. We keep coming back to the same point, our elected representatives in the Congress and the White House have a very different agenda from that of the mass of the population. As has often been noted, democracy is flawed. We get government that is representative of the lowest common denominator. This won't change until the wage earner learns to vote his/her own economic self interest instead of their fears and bigotries. When Charlie Rangel, Rep from Harlem, states that he's learned something from Henry Paulson concerning the need to reduce corporate tax levels, we're in deep dung. It's not just Bush.
His Administration simply lacks finesse.
The involvement or not of government aside, the macroeconomic picture for Wal-Mart looks dismal. Even with Wal-Mart's sneaky moves to reduce taxes, it looks like their growth figures are lagging. One can't help but wonder if it is their own doing?? Proof that it might not pay to run your employees ragged... or hide out in a tax shelter.
Time to face the music?
http://money.cnn.com/2007/10/23/news/companies/walmart/?postversion=2007102316
"Since Lee Scott took over as Wal-Mart CEO in January 2000, the stock [is down] 5 percent."
Ziiiing.
The article goes on to point out that Target is, well, more on target... "... versus a 104 percent gain in Target," J.P. Morgan analyst Charles Grom wrote in a note to clients Monday."
I wonder what kind of tax practices Target employs. Ethical, maybe?
how can there not be always available 'loopholes' and schemes when corp. taxes are determined by an accounting of transfers as though they are 'arms length'. Failure to make use of a unitary or combined method which brings in affiliated entities pretty much guarantees outcomes such as posted and can be expected to continue so long as capital is in control.
jan1ce,
Could it be that Wal-Mart has been more impacted by what has been a stagnant/declining working class income and weaker than officially portrayed post-2001 U.S. economy?
Other hand, Eliot Spitzer would not, IMO, be considered a 'working class hero' but apparently has been trying to correct the above mentioned.
Clip from the hardly liberal New York Sun, 2/28/07:
The term "loophole" implies a tax provision that can be exploited to produce results the law never intended. That might fit a few of Mr. Spitzer's proposals — such as eliminating Real Estate Investment Trusts as tax shelters. But it's a real stretch for Mr. Spitzer to apply the loophole designation to a provision of tax law that was specifically designed to encourage economic growth by limiting taxes on New York headquartered companies. That's the case with the biggest of the governor's proposed changes, which would raise $215 million a year from large, multistate firms.
The tax provision in question concerns the treatment of income generated by dealings between New York companies and their out-of-state subsidiaries and related companies. Current state law allows parent firms to avoid being taxed on the income of their subsidiaries if they can demonstrate that their "intercorporate" transactions are conducted strictly at arms-length while paying the subsidiaries fair prices for their products and services.
Corporate tax planners — whose job is to legally minimize what their employers pay — have tried to stretch this combined reporting exception by using subsidiary transactions to move profits from New York to less heavily taxed jurisdictions. But New York State has blocked or outlawed flagrant tax avoidance schemes, such as those attributing income earned here to trademarks owned by Delaware holding companies.
The raison d'etre of tax attorneys and accountants is to minimize the tax paid by corporations and the rich by whatever means necessary so long as the said means are at least arguably within the law. A fun book to read about such goings-on in Canada is Behind Close Doors (1988) by Canadian journalist Linda McQuaig.
Note McQuaig's book isn't so much about the doings of tax attorneys and accountants in Canada as it is about the post-war political struggles about the tax system in Canada. The point about the attorneys &c. comes in along the way.
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