Tax Valuation of International Transfers

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Tax Valuation of International Transfers


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Agenda

Introduction

Recent developments

Summary

Questions


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Introduction

International transfers

– Transfer of shares

– Transfer of intangible assets

TopCo

SubHolding A

SubHolding C

Opco2

Opco3

Opco1

SubHolding B

Transfer of shares

Transfer of intangible assets


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Recent Developments

1. Introduction of references to valuation techniques

2. General guidance

3. Options realistically available

4. Transfers for which valuation is highly uncertain at the time of the transaction

5. HTVI

6. Normalization regarding allocation of profit related to intangibles


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1. Introduction of references to valuation

Action 8-10 / revision of Chapter IV of the OECD Guidelines

“It is not the intention of these Guidelines to set out a comprehensive summary of the valuation techniques utilised by valuation professionals. Similarly, it is not the intention of these Guidelines to endorse or reject one or more sets of valuation standards utilised by valuation or accounting professionals or to describe in detail or specifically endorse one or more specific valuation techniques or methods as being especially suitable for use in a transfer pricing analysis.” (§6.156)

“Valuation techniques that estimate the discounted value of projected future cash flows derived from the exploitation of the transferred intangible or intangibles can be particularly useful when properly applied.” (§6.157)


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2. General guidance on tax valuation

Accuracy of financial projections

Assumptions regarding growth rates

Discount rates

Useful life of intangibles and terminal values

Assumptions regarding taxes


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3. Options realistically available

“In considering the options realistically available to the parties, the perspectives of each of the parties to the transaction must be considered.” (§6.112)

“For example, a transferor would not be expected to accept a price for the transfer that is less advantageous to the transferor than its other realistically available options, merely because a particular associated enterprise transferee lacks the resources to effectively exploit the transferred rights in the intangible. Similarly, a transferee should not be expected to accept a price for a transfer of rights in one or more intangibles that would make it impossible for the transferee to anticipate earning a profit using the acquired rights in the intangible in its business.” (§6.113)


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4. Intangibles for which valuation is highly uncertain at the time of the transaction

“Independent enterprises might, include price adjustment clauses or adopt a payment structure involving contingent payments to protect against subsequent developments that might not be sufficiently predictable. If independent enterprises would have agreed on the inclusion of a mechanism to address high uncertainty in valuing the intangible (e.g. a price adjustment clause), the tax administration should be permitted to determine the pricing of a transaction involving an intangible or rights in an intangible on the basis of such mechanism.” (§6.185)


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5. HTVI

“The developments or events that might be of relevance for the valuation of an intangible are in most cases strongly connected to the business environment in which that intangible is developed or exploited. (…) Tax administrations may not have the specific business insights or access to the information to be able to examine the taxpayer’s claim and to demonstrate that the difference between the ex ante and ex post value of the intangible.” (§6.186)

“In evaluating the ex ante pricing arrangements, the tax administration is entitled to use the ex post evidence about financial outcomes to inform the determination of the arm’s length pricing arrangements, including any contingent pricing arrangements, that would have been made between independent enterprises at the time of the transaction.” (§6.192)


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5. HTVI

How to protect?

The taxpayer provides:

– Ex ante projections

– Evidence that potential deviation is due to a) unforeseeable developments, or b) the playing out of probability of occurrence of foreseeable outcomes

Differences between the projections do not have the effect of reducing or increasing the compensation by more than 20%

A commercialization period of five years has passed

The transfer of the HTVI is covered by a bilateral or multilateral advance pricing arrangement


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5. HTVI

20% Safety Bandwidth

5 year period “at risk”

1 2 3 4 5 6

Evidence required that deviation is due to: - unforeseeable developments or - the playing out of probability of

occurrence of foreseeable outcomes

Time

Cas

h flo

w

Forecast used for discounted cash flow analysis purposes


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OECD introduces functional focus and introduces distinction between Development, Enhancement, Maintenance, Protection, and Exploitation (DEMPE) of intangibles

“Control over” functions, assets, and risks is considered essential for profit allocation purposes

Statements on compensation:

– Legal ownership without control over DEMPE would not be entitled to any ongoing benefit attributable to the outsourced functions

– Financing without control would not be entitled to any more than a risk-free return

– Profit split methods and ex ante valuation techniques are suggested to appropriately reward the performance of important functions


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Example 1 – Kitchen appliances company (consumer business)

Basis for profit allocation Performed/ Owned/Incurred

Control Over

Functions performed Development Germany Germany Enhancement Germany Germany / local distributors Maintenance Germany Germany Protection Germany Germany Exploitation Local distributors Germany / local distributors

Legal ownership Germany Germany Financing Germany Germany Risks Germany Germany / local distributors

Pre BEPS

Post BEPS


Control Over

Functions performed Development Germany Germany Enhancement Germany Germany Maintenance Germany Germany Protection Germany Germany Exploitation Local distributors Germany

Legal ownership Germany Germany Financing Germany Germany Risks Germany Germany


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Example 2 – Medical equipment company

Basis for profit allocation Performed/

Owned/Incurred Control Over

Functions performed Development Local manufacturers US Enhancement Local manufacturers US Maintenance Local manufacturers US Protection Luxembourg Luxembourg Exploitation Local distributors US

Legal ownership Luxembourg Luxembourg Financing US US Risks Luxembourg Luxembourg


Control Over

Functions performed Development Local manufacturers US & Local manufacturers Enhancement Local manufacturers US & Local manufacturers Maintenance Local manufacturers US & Local manufacturers Protection Luxembourg US Exploitation Local distributors US

Legal ownership Luxembourg US Financing US US Risks Luxembourg US & Local manufacturers

Pre BEPS

Post BEPS


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Summary / Take Away

New guidelines introduce high-level guidance on valuation techniques

The DCF method is introduced as the primary method

Options realistically available set a “floor price“

Earn outs to be taken into consideration

HTVI require special attention

New guidance on intangibles may complicate and impact tax valuations

Overall, tools are provided to tax authorities that will lead to more uncertainty regarding the valuation of intangibles assets


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Contact Information

Roderick Veldhuizen

Director, Amsterdam

[email protected]

+31 20 570 35 18

Todd Behrend

Principal, Atlanta

[email protected]

+1 404.682.1210

Ian Boccaccio

Principal, New York

[email protected]

+1 212.847.0124

mailto:[email protected]



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Tax Valuation of International Transfers