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By Siri Bulusu
Despite promises from U.S. Republican lawmakers that its landmark corporate tax cut will boost investment in the country, Walmart Inc.'s high-profile Flipkart Group acquisition shows other factors are still at play for multinational companies.
“Walmart’s deal with Flipkart is a once-in-a-decade opportunity given the strides Flipkart has made in the domestic e-commerce market—and frankly this is driven by market reasons and not U.S. tax reform,” Mukesh Butani, managing partner of BMR legal, told Bloomberg Tax May 11.
The U.S. cut its corporate tax rate to 21 percent from 35 percent as part of the 2017 tax act ( Pub. L. No. 115-97). The cut, along with other corporate and international tax reforms, came several months before Walmart’s May 9 announcement that it would acquire a 77 percent stake in e-commerce giant Flipkart, a $16 billion investment that gives it access to a ballooning retail market.
Analysts questioned the company’s decision to divert funds from improving the company’s domestic operations on an investor call following the announcement. But Walmart maintained it is still committed to the U.S.
“It is not our intention to let the business suffer as a result of investments made elsewhere.” CEO Doug McMillon said on the call. Walmart will “continually go through a process of prioritization to make sure our investments are balanced relative to where we see opportunity both sales and profit-wise in the mid and long-term.”
Not only does the deal give Walmart an edge over rival Amazon.com Inc. in the Indian online retail market, but practitioners said the investment was the company’s best opportunity for growth.
Flipkart currently holds a 35.7 percent market share in India’s e-commerce sector, which is expected to grow from $29.8 billion to $80.1 billion by 2022, according to a Bloomberg Intelligence report.
“The U.S. e-commerce market is fully saturated because Amazon is number one and no one can compete, so what choice does Walmart have—should they stick with the traditional model of setting up stores or enter into a country with such a huge potential for growth,” Suraj Nangia, partner at Nangia & Co. LLP, told Bloomberg Tax May 11.
The Flipkart investment represents a “unique opportunity, consistent with the approach of looking for innovative ways to grow domestically and internationally, particularly in markets with significant long-term opportunity,” Walmart said in a May 9 news release.
Walmart shares saw a dip following the announcement, with share prices dropping from $85.75 at the end of the day May 8 to $82.69 by opening on May 9—a drop in value that should be considered part of the deal, say practitioners.
“This drop in market cap is something Walmart will make back over time, but it shows what a bet the company is making by acquiring Flipkart,” Uday Ved, a Mumbai-based chartered accountant, told Bloomberg Tax May 11.
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