Walmart de Mexico SAB’s landmark $370 million settlement came as it faced potential criminal tax fraud charges amid a crackdown by the Mexican government on big companies.
Earlier this year, officials filed a criminal complaint with federal prosecutors over the strategy that Walmart Inc.’s Mexican business, known as Walmex, used to minimize its profits from the 2013 sale of a restaurant chain, according to three people familiar with the matter who requested anonymity since tax matters are protected by privacy laws.
The settlement, announced last month, was the largest in recent history, according to half a dozen tax experts, and it marked a decisive moment in Mexican President Andres Manuel Lopez Obrador battle to end widespread tax evasion in Mexico since taking office in late 2018. It also reduces the likelihood that the world’s largest retailer will face further prosecution on tax issues.
The agreement has raised concerns for chief financial officers and auditors, who fear the government could turn threats of prosecution and public shame on them, and many are rushing to settle tax disputes, the people said.
Only days after the Walmex settlement was announced, Coke bottler and convenience store operator Fomento Economico Mexicano SAB said it would pay an even bigger settlement of 8.8 billion pesos, or about $410 million, to avoid going to court. Over the weekend, Lopez Obrador said International Business Machines Corp. agreed to pay 669 million pesos.
Walmex’s payment is equal to just over 1% of the company’s annual revenue from 2019. Femsa’s settlement represents less than 2% of its 2019 revenue.
Mexico’s tax authority, known as SAT, didn’t respond to a request for comment. In response to questions from Bloomberg News, Walmex said that it had worked with tax authorities to interpret “complex” laws. “As a result, we closed several open tax assessments before the SAT to provide certainty and to conclude these complex matters,” Walmex said.
Walmex shares fell 0.6% on Wednesday to 55.01 pesos, their lowest level since mid-April, paring the year-to-date gain to 1.6%. Mexico’s benchmark IPC index has fallen 12%.
Walmex was Walmart’s first foray outside the U.S. While the retailer has struggled in regions like Germany, Japan and Brazil, Mexico has been the jewel of Walmart’s international operations. CEO Doug McMillon called the business a “gem” in a recent investor conference.
Sales grew 5.2% there last year, making it the fastest-growing region in Walmart’s $124 billion international unit. While Walmart has pretty much stopped opening new stores in the U.S., it opened 134 in Mexico last year.
Nonetheless, Walmex’s reputation in Mexico suffered following allegations it bribed Mexican officials over a decade ago to fast track store openings. Walmart Inc. agreed to pay $282 million in penalties last year after a seven-year corruption probe that spanned the globe.
Late last year, Mexico passed new laws that classify tax fraud as organized crime and allow officials to jail executives facing charges as they await trial. Lopez Obrador argued the country’s wealthy and major companies had enjoyed tax forgiveness for decades under “corrupt” administrations.
As the coronavirus outbreak gripped the country, Lopez Obrador refused to offer fiscal breaks and instead demanded that big companies cough up billions of pesos in tax debts. While he refrained from naming Walmex, he repeatedly said that major companies haven’t paid enough taxes and that some had broken the law.
The government’s push to target tax evasion has gained urgency as Mexico faces a sharp downturn in revenue due to the current recession.
The crackdown on companies marks a change over recent decades, when the government took a much less aggressive stance with big companies as part of a strategy to promote investment and create jobs, said the people familiar with the matter. Foreign companies in particular were rarely targeted with criminal complaints.
Walmex’s settlement is related to the 8.2 billion-peso sale in 2014 of its restaurant chain Vips to Alsea SAB, which operates the Starbucks and Domino’s Pizza brands in Mexico and other countries. Tax advisers initially thought the company would be able to easily fight the claim. But last week’s settlement “sent shockwaves” through tax and corporate circles, said Mauricio Martinez, a partner at Deloitte in Mexico.
Walmex had not declared any taxes at the time of the sale, two people with knowledge of the audit said. The tactics used by Walmex to reduce its tax obligations have been used by other companies, according to several of the tax experts.
Walmex did not comment on the tax strategy it used in the sale that sparked the original audit, but said “the payment is a result of the review of the substantial tax assessments open from 2014 to 2018 and our work with the SAT to interpret these complex tax laws.”
The Mazatlan Post