The Wall Street Journal did one of its regular, and well researched reports on tax last week. I was so bogged down in writing the report mentioned earlier today I didn't cover the story, but it's worth drawing attention to because it illustrates some of the points in that report really well. As the WSJ reported:
As the world's biggest retailer, Wal-Mart Stores Inc. pays billions of dollars a year in rent for its stores. Luckily for Wal-Mart, in about 25 states it has been paying most of that rent to itself -- and then deducting that amount from its state taxes.
As Jesse Drucker, author of the report notes:
The arrangement takes advantage of a tax loophole that the federal government plugged decades ago, but which many states have been slower to catch. Here's how it works: One Wal-Mart subsidiary pays the rent to a real-estate investment trust, or REIT, which is entitled to a tax break if it pays its profits out in dividends. The REIT is 99%-owned by another Wal-Mart subsidiary, which receives the REIT's dividends tax-free. And Wal-Mart gets to deduct the rent from state taxes as a business expense, even though the money has stayed within the company.
Actually the REIT is 100% beneficially owned by Wal-Mart - the requirement that there be 100 members is made up by 99 Wal Mart executives lending their names to fulfil the requirement.
The result is that on average, Wal-Mart has paid only about half of the statutory state tax rates for the past decade and the REIT strategy alone cut Wal-Mart's state taxes by about 20% over one four-year period.
The scheme was, of course, created by a Big 4 accountant - Ernst & Young in this case. The reality of the scheme was that tax was not paid simply due to the use of artificial internal structures.
It's no surprise that the Tax Justice Network now reckons that there are three 'secrecy spaces' in the world of tax. They are offshore, tax accounting and group accounts. This scheme entirely missed the first, but the other two gave all the opportunities needed for abuse.
Wal-Mart was free-riding the system. No one likes people who do that. least of all when they have the greatest capacity to pay.