AAR Ruling on Tiger Global’s Exit in Flipkart, Wal-Mart deal could impact PE exits

AAR Ruling on Tiger Global’s Exit in Flipkart, Wal-Mart deal could impact PE exits

Wal-Mart acquired controlling stake in Indian online retail leader Flipkart in 2018 and Tiger Global’s Mauritian arm sold its stake to Luxembourg based entity. However, Tiger Global managed to get exemption on taxes under India-Mauritius double tax avoidance treaty. Now, the Authority on Advanced Ruling in India has passed an order on the deal and Tiger Global could be in for tax trouble.

Many big investments have come to India via Mauritius route. At the same time, many companies and high-networth individuals have used it to benefit unethically. Indian government moved to plug the holes and imposed stricter conditions on the investments flowing into Indian markets and companies.

The latest AAR ruling has concluded that the Tiger Global’s Mauritian entities were set up only to derive benefit under the tax treaty. The exemption under the DTAA can only apply to direct transfer of an Indian entity’s shares, it said while denying the treaty benefits.

Vivek Gupta, Partner and National Head M&A, KPMG India said, “In some ways, the principle purpose test under the multilateral convention to implement tax treaty has effectively been imported into tax treaties by the authority even where this was not explicitly adopted. For transactions where treaty eligibility itself is questioned, other income flows such as dividends and interest could also be impacted.”

Ravi Raghavan, partner at Majmudar & Partners, said, “The order can’t be applied generally to all investment structures as each case has its own peculiarities. It’s essentially based on specific facts relating to the ownership structure, financial control and management of the Mauritian entities.”