Walmart’s $16 Billion Flipkart Investment May Be Tax Minefield

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By Siri Bulusu

Walmart’s landmark acquisition of Indian e-commerce giant Flipkart is a ticking tax bomb waiting to explode.

Tax troubles abound, practitioners told Bloomberg Tax. Walmart Inc. announced the deal on May 9, and will invest about $16 billion dollars to acquire a 77 percent initial ownership stake in Flipkart Group, calling it a “significant opportunity to partner with local leader in a large, fast-growing market.”

Practitioners say the landmark acquisition will invite intense scrutiny from India’s tax authority since most of the transaction deals with non-resident shareholders. This means the government will likely initiate litigation under its General Anti-Avoidance Rule (GAAR), which empowers Indian tax authorities to review and re-characterize transactions where the “main purpose” is to obtain a tax benefit.

The deal could become entangled in the domestic laws of the countries in which Flipkart’s shareholders reside. In addition, practitioners warned, the tax authority in India may contest treaty protections shielding the deal from capital gains tax.

“Of course tax professionals anticipate that a round of litigation could stem from this deal, since the Indian government will not want to let go of its share of taxes as the value of such shares are substantially derived from India,” Shailesh Kumar, director of direct taxation at Nangia & Co LLP, told Bloomberg Tax May 10.

The deal gives Walmart a foothold in a market that it expects to total $1.3 trillion in five years, Steve Schmitt, head of investor relations, said on a conference call following the announcement. It also gives Walmart an edge over rival Amazon.com Inc., which had also been in negotiations with Flipkart.

Walmart and Flipkart didn’t return requests for comment.

Singapore Celebration

Flipkart is owned by Singapore-based Flipkart Online Services Pvt. Ltd., which is held by various shareholders including SoftBank Group Corp., Tencent Holdings Ltd., Microsoft Corp., and Tiger Global Management LLC.

Since the shareholders aren’t located in India, their earnings from the deal are subject to tax in their respective local jurisdictions.

Kumar noted that investors earning capital gains from the deal in Singapore and Mauritius could potentially be exempt from capital gains tax, because of the terms of a recently re-negotiated tax treaty between the countries and India.

“There could be cause for a huge celebration for the Singapore investors,” he said.

The exemption will bring about a “very, very interesting tax situation” which will involve interplay of domestic tax laws with treaty exemptions, Kumar said.

‘Vodafone Tax’

India’s domestic tax law includes a provision that allows the government to levy taxes on an indirect transfer of shares when the underlying value of those shares is derived in India. Commonly referred to as the “Vodafone tax”—coined on the back of a long running tax dispute between the Indian tax authority and Vodafone Group Plc.—the law requires the purchaser of shares, in this case Walmart, to withhold a 20 percent capital gains tax before making a payment.

Tax treaties overrule domestic tax law, Kumar explained, but the Indian government will look for reasons why the treaty benefits should not apply to this transaction.

“The first stage of compliance will catch up with Walmart because at this stage the government will say the company should be withholding the tax before making any payments,” Kumar said. “Walmart could receive a notice from the tax department asking them to demonstrate how the transaction was not taxable and why they did not deduct any capital gains tax.”

Recalculating the Tax Bill

Flipkart may also see a large change in their tax bill. That’s because of an Indian tax law that bars companies from deducting losses against taxable income if the immediate shareholders of the Indian entity are changed.

Practitioners said if Flipkart Singapore remains the primary holder of Flipkart India, then the company could claim there was no change in the immediate shareholders, and should therefore be allowed to deduct its losses. However, the government could allege that a change in ownership higher up in the company structure is equivalent to an immediate ownership change and levy a 34 percent income tax on all of Flipkart India’s profits.

“They could take the view that it is essentially a change in shareholding and that the Indian entity’s losses cannot be carried forward,” Sahil Aggarwal, manager at Dezan Shira and Associates, told Bloomberg Tax May 10.

Can’t Avoid Anti-Avoidance Rule

India’s GAAR rule could trump all tax treaty benefits and domestic tax laws if the government can make a case that the transaction was structured in a manner to avoid paying taxes in India, practitioners said.

“GAAR can override tax treaties if the Indian tax authorities seek to invoke it,” Maulik Doshi, transfer pricing and transaction advisory services partner at SKP Business Consulting LLP, told Bloomberg Tax May 10.

The Indian government has left the language of GAAR to be wide enough to apply to a wide variety of transactions, practitioners explained, making it a powerful tool when bringing litigation against companies.

Still Time to Change

Doshi said the only way for Walmart, Flipkart, and Flipkart shareholders to ensure tax certainty is to seek an agreement with the Authority for Advance Rulings—a government body charged with settling tax bills before returns are filed.

“The Authority on Advance enables taxpayers to ascertain the tax liability on their transactions well ahead—and it will be binding on the government and the taxpayer, an effective way to curb litigation,” Doshi said.

While Walmart could still seek an advance ruling, the government body is facing a huge backlog of cases, which could put Walmart’s case at the end of a years-long queue—and practitioners doubt the company wants to wait that long for certainty.

“In the time it takes for an AAR to come through, Walmart or Flipkart could see their case reach the high court if it gets into litigation,” Kumar said.

To contact the reporter on this story: Siri Bulusu in New Delhi at correspondents@bloomberglaw.com

To contact the editor on this story: Penny Sukhraj at psukhraj@bloombergtax.com

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