Walmart (WMT) stock, on its surface, seems like one of the most conservative investments in the stock market today. Revenue and earnings are expected to tread water for the foreseeable future, and earnings predictability allows it to pay a dividend that has risen annually for the last 40 years.
But there’s a massive, multibillion-dollar risk that isn’t incorporated into the WMT stock price: Walmart could be skirting SEC and IRS rules by using an intricate web of tax havens to hide $76 billion in overseas assets.
That’s according to a new report that came out Wednesday from Americans for Tax Fairness, a group with a self-explanatory mission funded by a variety of foundations and public-sector unions.
In an early response to the allegations, a Walmart spokesman scoffed at the report and characterized it as misleading. The jury’s still out on that … but one fact is undeniable: Wall Street is ignoring the colossal risk this report poses to the WMT stock price if there’s even a whiff of truth to the report.
The Report and Its Major Potential Ramifications
Yesterday, the day this report was released, WMT stock gained 0.5%. If investors took this threat seriously, the stock should have been off by a few percentage points at a minimum, as the allegations are fairly damning. The highlights:
- WMT has 78 subsidiaries and $76 billion in assets in overseas tax havens.
- None of the countries where these subsidiaries exist even have Walmart stores.
- In 2014, Walmart borrowed $2.4 billion from its own overseas subsidiaries via short-term, low-interest loans that avoid the 35% repatriation taxes — a practice that may be illegal.
- WMT failed to disclose these 78 subsidiaries in Exhibit 21 of its 10-K, a transgression that’s against SEC rules.
- The report calls on both the SEC and IRS to investigate Walmart — and you’d better believe the IRS will take more than a cursory look at these allegations considering the Obama administration is cracking down on corporate tax avoidance.
While published by Americans for Tax Fairness, the research behind the report itself was actually conducted by the United Food & Commercial Workers International Union, a politically active group that lobbies for better treatment of workers in the industry.
Source: Americans for Tax Fairness
But the fact that the study was conducted by a group with an agenda doesn’t change the fact that this poses a new, previously unknown risk to WMT stock, which would undoubtedly face bearish pressure if these loopholes were closed, or if the company was forced to pay back-taxes or fines.
One of the actions called for at the conclusion of the Walmart tax report could be particularly troublesome if regulators heed it:
“The European Commission should determine whether Luxembourg has been providing Walmart with sweetheart tax deals equivalent to illegal state aid.”
While I think both U.S. and European regulators will take the study seriously, the European Commission has a history of actually taking action.
Just last year, the EC launched inquiries into Apple (AAPL), Starbucks (SBUX), Amazon (AMZN), and Fiat Chrysler (FCAU) for striking sweetheart tax deals with EU member countries. Google (GOOG, GOOGL) is also taking heat for overseas tax practices, and the U.K. instituted a “diverted profits tax” dubbed the “Google tax” in April.
Again, the merits of the Walmart tax haven accusations are still up in the air. But where there’s a will there’s a way, and if the report holds any water at all, EU and U.S. regulators will be more than willing to recoup whatever revenues they can salvage.
As of this writing, John Divine was long shares of GOOG stock, GOOGL stock, and AAPL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
