Wednesday, November 26, 2014

Walmart, Tax Fairness and How to Exploit Tax Loopholes

Now that we're getting into the major shopping weeks of the retail year, I thought that this posting was particularly pertinent, given that it's about the world's largest retailer.

Walmart is the largest corporation in the United States with domestic net sales of $279 billion  during fiscal 2014 and corporate-wide net profits of $15.918 billion. Worldwide revenues in 2014 were $476.294 billion with a gross profit margin of 24.3 percent.  In the United States, the company has 1.2 million "associates" or employees as the rest of the world knows them.  This makes Walmart the biggest single private employer in the United States.  According to Forbes, it also happens to have the wealthiest family in America as its owners with Christy Walton having $41.1 billion in assets putting her in sixth place in the U.S. pantheon of the most wealthy, Jim Walton, the youngest son of Walmart founder Sam Walton having $40 billion in assets, putting him in seventh place, Christy's sister-in-law and Sam Walton's daughter, Alice Walton, having $38.5 billion in assets, putting her in eighth place and S. Robson Walton, Sam Walton's oldest son, and Walmart's current Chairman of the Board having a mere $38 billion in assets in 2014, putting him in ninth place.  Not only is Christy Walton one of the richest people in the United States, she is the wealthiest woman in the world.  While all of this information may seem like an unnecessary aside, Walmart, like many of its corporate peers, prides itself on its ability to pay higher and higher levels of dividends to its shareholders.  Walmart proudly announced that it had increased its dividend for the 41st consecutive year to $1.92 per share.  Here is a look at how many shares Walmart's key Walton insiders control from the company's 2014 Proxy Statement:


As you can imagine, by controlling millions of Walmart shares, every time Walmart raises its dividend, the Walton family gets substantially richer.

With that as background, let's look at a report by Americans for Tax Fairness that gives us an idea of how much Walmart pays in taxes and what accounting maneuvers it makes to avoid paying more than it already pays.

As we know, the headline corporate tax rate in the United States is 35 percent.  While they like to complain, most companies pay nothing that even approaches this rate.  Walmart is no exception.  Over the period from 2008 to 2012, Walmart's effective tax rate was 29.1 percent, with loopholes allowing the company to reduce its tax bill by $5.1 billion over the five year period.  Walmart accomplished this by using "accelerated depreciation" which allows companies to write-off any capital investments that they make faster than those capital goods wear out.  In straight-line depreciation, an asset depreciates at the same rate throughout its useful life.  When companies use accelerated depreciation, as time passes, the effect reverses and there is less depreciation available to shelter income.  Accelerated depreciation is a means of deferring taxes into the future but as long as a company continues to make new capital investments, the tax deferral mechanism becomes more or less indefinite.

As a company that operates outside of the United States, Walmart is also able to avoid paying taxes on its ample offshore profits.  In 2008, Walmart's offshore entities earned net profits of $10.5 billion.  This rose to $21.4 billion in 2013 as shown on this graph which also shows how Walmart's capital expenditures on its international operations have not risen since 2008:


Walmart will pay $0 in taxes on these offshore profits as long as they are not returned to the United States.  Under a territorial tax system, all U.S. taxation of Walmart's overseas profits would be eliminated and Walmart would pay taxes solely in the country in which they are earned.  Countries with lower corporate tax rates than the United States will then become particularly appealing targets for operational expansions as shown on this chart which shows the top ten nations receiving additional profits under a territorial system and their effective tax rates on United States affiliates:
  

This means that Walmart would be creating jobs outside of the United States rather than at home, in fact, this commentary shows that a territorial tax system would created 800,000 jobs in low-tax nations.  

As I am prone to do, let's see how busy Walmart has been in Washington.  Here is a screen capture showing how much Walmart has contributed to political candidates in the 2014 cycle:


Walmart's 2014 cycle contributions of $2,403,466 puts the company in 88th place overall among 16,411 donors.

Here is a chart showing the actual size of the overall contributions made to Democrats and Republicans:


It is quite clear that Walmart/the Walton family have a strong preference for donations to the Republicans over the Democrats.  It's also interesting to see how the level of their donations rose markedly during the 1990s and how the level has pretty much flatlined since the 2004 Presidential cycle.

Here is a graph showing how much Walmart has spent on the all important game of lobbying in Washington since 1998:


So far in 2014, Walmart has spent $5.22 million on lobbying.  In its peak year of 2011, Walmart spent  $7.84 million on lobbying.  As you can see on this chart, thus far in 2014, among its retail sector peers, Walmart has spent the second-most on lobbying after CVS Health:


In 2014, Walmart has 74 lobbyists with 81.1 percent being revolvers, that is, they have previous connections/employment in Washington.  

Here is a chart showing the issues that have been of most concern to Walmart in 2014:


Not surprisingly, Walmart is most concerned about taxes.

Now, let's travel to an imaginary world for a moment and pretend that America actually has a functional Congress.  If Congress were to sit down and agree to lower the headline corporate tax rate by 10 percentage points to 25 percent, based on the $87 billion in profits that Walmart earned over the five years from 2008 to 2012, they would have paid $3.6 billion less in taxes or $7 billion less over a ten year period.

Perhaps instead of its former "Always Low Prices" motto, Walmart's could recycle and revise its new motto to read "Always Low Taxes".