E-commerce taxation – An analysis in the wake of Flipkart-Walmart deal

June 07,2018
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Akshay Kenkre (TransPrice Tax Advisors LLP)

Asmi Nandola (TransPrice Tax Advisors LLP)

The energetic rise of multi-national e-commerce businesses:

With the advent of internet a few decades ago, the online marketplace has gained an impetus in recent years, thereby revolutionizing the B2B, B2C and C2C transactions. As a consequence, the hassles of physical limitations, investment of time and boundaries among the nations have been eliminated. Such an elimination has effectively brought the world closer than ever before. Information and communication technology (‘ICT’) has played a vital role in boosting the growth of the global e-commerce industry which has surpassed $2.3 trillion[1] in revenue as of 2017. Convenient and seamless transactions across countries are no more a distant reality. Amazon, Alibaba, Rakuten are few of the major players in the cyber commerce arena of today.

A steady growth of e-commerce start-ups can be witnessed as more and more people depend upon services of e-businesses. Internet retailers like Amazon and Flipkart; payment systems like PayPal; wholesale markets like Alibaba.com; search engines like Google; commuting services like Uber; online advertising like AdWords; online grocery stores like Bigbasket and Grofers; etc. have created a prominent presence in the cyber commerce arena. The opportunities for greater market reach are boundless. Many countries have governmental regulations in place to protect cyberspace and for smooth operability of cross-border transactions. Although e-commerce accounts for a small portion of total trades that take place, the percentage of e-commerce transactions is on a rise.

Valuation of e-commerce businesses:

At the outset, e-commerce garnered mixed reactions from the masses. These dot com entrepreneurs have tactfully converted their customers’ ‘apprehensions’ into ‘increasing confidence’. Resorting to aggressive media tactics, they are in the race to capture today’s consumer-driven market. Funding, revenues and valuations are increasing but at the cost of incurring losses themselves. Indeed, it raises the question – how are such businesses valued highly despite sustaining huge cash losses?

Acquisitions of one cyber company by another is a regular news nowadays. Valuations of e-commerce enterprises are not based on the traditional Discounted Cash Flow (‘DCF’) Valuation Model. Rather, the valuations are being based on multiples of revenue traction and long-term growth prospects. Additionally, reliance on goodwill generation and attractive promises of high returns in the future could also be other factors in the valuation game. It is asserted in the market that such e-commerce start-ups which are knee-deep in losses garner high valuations not because of their profitability; but due to the creation of brand value, market capitalisation, achievement of critical mass, customer base, etc.

Further, it is a known fact that a cut-throat business model incurs huge Advertising, Marketing and Promotional (‘AMP’) expenses towards the aim of brand-building and product loyalty. Such e-commerce businesses focus on technology and development of market-facing intangibles – IPRs (Intellectual Property Rights) such as but not limited to trademarks, brand names and very valuable customer databases. These exorbitant outlays are a key cause of the hefty cash burns and losses borne by the e-commerce players.

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