Monday (March 28, 2016), San Juan, PR, Gil@prnewsroundup.com
In a ruling released Monday morning, Judge José A. Fusté of the Federal District Court in San Juan declared unconstitutional an alternative minimum tax (AMT) created by the Commonwealth of Puerto Rico.
The stated purpose of the swiftly enacted Act 72–it took only 12 days from the introduction of the bill to the signing of the law–was to deter abuse of transfer pricing.
The law introduced two major changes: 1. rates increased from 2% to 6.5% for corporate taxpayers with annual revenues above $2.75 billion; and 2. The Treasury Secretary was stripped of his ability to waive the AMT in situations where there was no suspicion of transfer pricing abuse.
While other companies fell into the lower brackets of the law, only Wal-mart Puerto Rico, Inc. (Wal-mart PR) was subject to the highest rate.
In his 109-page opinion today, Fusté ruled that the law was, in fact, a targeted measure whose purpose was merely to collect more funds from the island’s largest taxpayer, and that there had never been any suspicion of transfer pricing abuse.
Fusté said the law ran afoul of multiple constitutional provisions and statutory laws, and said that jurisdiction in the federal court system was appropriate since Wal-mart PR would not have been able to get swift remedy in Commonwealth courts.
After enumerating a series of challenges Wal-mart PR would have faced, Fusté wrote, “[t]hat is the very definition of an inadequate remedy.”
Wal-mart PR–which has paid the lower AMT rate for years–only took the matter to court in December 2015 after the rise became law, saying that the new formula resulted in a tax rate of between 91% and 114% of its net revenues.
A four-day trial was held at the Federal Courthouse in San Juan in February 2016.
While state and territorial tax matters are almost always resolved in state or territorial courts, Wal-mart PR chose to file in Federal Court, arguing that the law violated federal law, and it could not get a speedy resolution in the Puerto Rican judicial system.
In addition to claims of improper taxation, Walmart PR said that due to Puerto Rico’s precarious economic position, the government would not be in a position to refund any taxes paid to the Commonwealth during a multi-year set of legal maneuvers. Disputed taxes are generally paid, and then refunded if the taxpayer’s suit succeeds.
The Commonwealth’s response in court centered primarily on technical issues, of jurisdiction and of a state’s right to levy and collect taxes.
Wal-mart PR is the largest private employer on the island, with over 14,000 employees. Of the $3 billion in product sold annually, it purchases approximately $700 million annually from its United States affiliated companies and an additional $1.6 billion from on-island merchants.
In addition to $70 billion in debt and over $45 billion in unfunded pension liabilities, the island territory of Puerto Rico is facing particularly grim systemic (health, education, police) and social crises (mass migration, low unemployment, low workforce participation rate).
Fusté’s ruling–and the case itself–was always about much more than a tax on Wal-mart PR, however.
As a part of discovery in the case, and subsequently as a part of the trial held in open court, ELA officials were forced to testify about the island’s finances, financial reporting, and whether or not the island can continue as a going concern.
The results starkly contrasted one another: some descriptions the island’s senior leaders had made in the national and international press for months did not appear to be consistent with those made under oath.
Puerto Rico released a draft version of the 2014 audit roughly two weeks after the trial.
The finalized audit has still not been released, 637 days after the fiscal period’s close. ELA officials say they project it will be ready in April 2016.
Late Monday ENDI quoted Governor Alejandro García Padilla as saying Judge Fusté had “just taken $100 million from the people of Puerto Rico to give it to Walmart”. The governor continued: “Of course we’re going to appeal. The court does not have jurisdiction, and we were never permitted to see the financial statements of Walmart to see if they were telling the truth.”
García Padilla’s comments appear to be contradicted by today’s ruling, in which Fusté enumerates the four-step process and precise formulae involved in Wal-mart PR’s transfer pricing.
An appeal would go to the Federal First Circuit in Boston.
Page-by-page review of the ruling, see Storify timeline.
Previous coverage on the Wal-mart PR case:
- February 3, 2016. Day one, Melba Acosta-Febo (Head of the Government Development Bank of Puerto Rico): http://prnewsroundup.com/2016/02/03/walmart-v-puerto-rico-trial-day-1/
- February 4, 2016. Day two, KMPG (auditing firm for Puerto Rico’s 2014 audit) : http://prnewsroundup.com/2016/02/03/kpmg-bombshells-on-day-2-of-walmart-trial-ela-is-to-blame-for-delay/
- February 5, 2016. Day three, Juan Zaragoza (Puerto Rico’s Treasury Secretary) : http://prnewsroundup.com/2016/02/04/full-story-pr-treasury-secretary-zaragoza-testifies-at-walmart-trial/
By using proper attribution, you’re supporting the handful of English-language journalists who cover Puerto Rico in detail. Please don’t copy, link instead.
Recommended Citation: Gil Hall, “Judge Fusté Rules on Wal-mart PR Transfer Pricing Case”, http://prnewsroundup.com/2016/03/28/judge-fuste-rules-on-wal-mart-pr-transfer-pricing-case/
Published: 20160328 182211
Updated: 20160329 100627
- Edited “More Coverage” .