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13 Δεκ 2013 (πριν από 4 χρόνια και 5 μήνες)

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any predict a strong year for merger and acquisition activity in
2013. If this proves to be the case, there will be an uptick in
purchase price allocation analyses (PPAs) and the subsequent impair-
ment testing that follows.
The pick-up in M&A activity will likely also increase the need for
valuations for tax purposes as companies work to integrate the
acquired company into their existing legal entity structure. All of this
raises an important but complicated question: Can an intangible asset
valuation done for financial reporting purposes be used for transfer
pricing purposes?
After an acquisition, many multinational companies wish to
move the ownership of certain acquired intangibles from their cur-
rent legal entities to other legal entities within the controlled group.
This may be done for a host of reasons, including supply chain opti-
mization, improved tax efficiency, the simplification of intercompany
transactions and the facilitation of research and development/tech-
nology sharing within the group.
The shifting of intangible assets between legal entities within a
controlled group falls squarely under the various tax codes and regu-
lations that govern the pricing of such transactions. Most notably,
this includes Section 482 of the Internal Revenue Code and its cor-
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Nathan Levin
Jill Weise
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responding regulations (Section
482, or the regulations). Section
482 governs the pricing of inter-
company transactions in the
U.S., which is better known as
“transfer pricing.” The values
determined within the transfer
pricing framework vary, often
significantly, from the values
determin ed for financial report-
ing purposes.
According to the regulations,
“Allocations or other valuations
done for accounting purposes
may provide a useful starting
point but will not be conclusive
for purposes of the best method
analysis in evaluating the arm’s
length charge in a Platform Contribution Transaction (PCT),
particularly where the accounting treatment of an asset is in-
consistent with its economic value.” (A PCT is a buy-in pay-
ment re quired for one cost-sharing participant to buy into
another’s existing intellectual property and equals the arm’s-
length value of the contribution).
To understand the Internal Revenue Service’s (IRS) re-
luctance to rely on valuations prepared for financial report-
ing purposes, one should first look at the differing
frameworks underlying each type of analysis. Some attrib-
utes of financial reporting analyses include:
n Pursuant to Accounting Standards Codification (ASC) 805
and International F
inancial Reporting (IFRS) Standard 3, intan-
gible assets are identified and valued if they are separable or
arise from contractual or other legal rights;
nThe useful life of each identified intangible asset is the pe-
riod o
ver which the asset is amortized for financial reporting
nThe difference between the consideration paid and the fair
alue of the identified tangible and intangible assets is repre-
sented by goodwill, a residual concept;
n For financial reporting purposes, if the financial projections
used to v
alue the acquired intangible assets include buyer-
specific synergies and if these synergies (or a portion thereof)
were paid for, then these synergies are subsumed within good-
will; and
n Goodwill may also include the value of the acquired assem-
bled w
orkforce, future (to-be developed) technology and future
(to-be acquired) customers.
Within transfer pricing, intangibles are often viewed as
having intertwined economic value and thus are bundled for
the purpose of valuation. As a general matter, identified intan-
gibles within the transfer pricing framework may capture cer-
tain attributes of the business that do not require separate
recognition for financial reporting purposes. This results in cer-
tain elements of goodwill (as
determined for financial report-
ing purposes) falling within the
identified asset values for trans-
fer pricing purposes. For exam-
ple, buyer-specific synergies,
future technology, future cus-
tomer relationships, as well as
the right to exploit future busi-
ness opportunities are generally
not identifiable assets for finan-
cial reporting purposes and
therefore fall to the residual
goodwill value. However, these
elements are typically not con-
sidered goodwill, and are thus
compensable, for tax purposes.
Taxing authorities understand
that the goodwill recognized for financial reporting purposes has
a broader definition than that of transfer pricing. This is because
under the regulations, there is an expanded view of what com-
prises intangible asset value.
In addition to the different ways in which intangible assets
are defined and categorized for financial reporting and transfer
pricing purposes, there are several key methodological differ-
ences that lead to material differences in value in most cases.
Intangible asset valuations prepared for both financial re-
porting and transfer pricing purposes often utilize an Income
Method. Given the common name and the common use of
projections and discount rates, the differences, many of which
are seemingly subtle, are often missed. Not appreciating these
differences leads many companies to use the values prepared
for the PPA or impairment analysis for transfer pricing purposes.
Requiring a valuation done for financial reporting purposes
to perform “double duty” as a tax valuation, typically leads to
unrecognized tax exposures. This is because the intangible asset
valuations performed for transfer pricing purposes often result in
higher values than those performed for financial reporting pur-
poses under transfer pricing’s application of the income method.
To better understand this dynamic, we focus on four key
methodological differences between the Income Method used
for financial reporting purposes and the Income Method used
for transfer pricing purposes.
n Difference 1: Pre-Tax vs. Post-Tax Analysis
aluations performed for financial reporting purposes are pre-
pared using after-tax cash flows. Valuations done for transfer
pricing purposes often apply a post-tax discount rate to pre-tax
operating income. This treatment is, under the regulations,
meant to provide a shortcut that ensures both buyer and seller
are willing to enter into the transaction in question after tax
costs (i.e., capital gains taxes) and tax benefits (i.e., tax-
deductible intangible amortization) are taken into account.
While the shortcut is appropriate only under certain cir-
An uptick in
U.S. dealmaking will
mean more intangible
assets will need to be
valued, creating unique
and challenging accounting
and tax implications.
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cumstances, its use by prac-
titioners and the IRS is fairly
pervasive. The inclusion of a
tax amortization benefit in
financial reporting may
work to mitigate the differ-
ent treatment of tax under
financial reporting and
transfer pricing frameworks,
but it likely will not com-
pletely eliminate the differ-
ence. In many cases, the
different treatment of tax
issues in PPAs relative to transfer pricing valuations causes
transfer pricing valuations to be higher than those determined
for PPA purposes.
n Difference 2: The Premise of Value is Different
Fair value is the definition of value used for financial
reporting. For transfer pricing, the premise of value is
the arm’s length standard. On their face, it might seem that
both attempt to capture the price that would be paid for an
asset between unrelated parties and thus should, in their
essence, be equivalent concepts.
However, the critical difference between the two is that
fair value looks to estimate the price that an asset could be
sold for, in an exit transaction with a market participant
buyer, while the arm’s length standard looks to estimate the
price that would be paid by a specific buyer to a specific
seller at arm’s length.
Thus, while a valuation prepared for financial reporting pur-
poses always excludes buyer-specific synergies from the fair
value of an intangible asset, these synergies are included in the
intangible asset value for transfer pricing purposes. Like the use
of pre-tax income, all else equal, this difference leads to rela-
tively higher intangible asset values for transfer pricing purposes.
n Difference 3: The Treatment of Future Business Opportunity
Other than in-process resear
ch and development, the value of
the right to create future business opportunity and, therefore,
new intangible assets, is generally subsumed within goodwill
for financial reporting purposes. Like the treatment of buyer-
specific synergies, the right to exploit future business opportu-
nities is compensable, and thus not considered goodwill, for
transfer pricing purposes.
At a minimum, this difference typically leads to extended
useful lives in transfer pricing valuations relative to those used
for financial reporting purposes. As with the other differences
discussed, all else equal, the treatment of future business op-
portunities for transfer pricing purposes is likely to lead to in-
creased intangible asset values.
n Difference 4: Reporting Units vs. Legal Entity Valuations
Intangible asset valuations prepared for financial reporting
purposes are generally per-
formed at the enterprise
level with intangible asset
values then assigned to
reporting units. Reporting
units may be organized
based on either product,
geographic or other criteria,
depending on how the busi-
ness is managed. This is
likely different than the legal
entity framework required
for transfer pricing purposes.
For instance, one legal entity may contain portions of dif-
ferent reporting units and a single reporting unit may include
several legal entities. Therefore, intangible asset values deter-
mined for financial reporting purposes may span across several
taxing jurisdictions and legal entities.
This difference may make the use of projections devel-
oped for financial reporting purposes inappropriate for trans-
fer pricing purposes, though reconciliation between different
sets of financial projections should be performed when valua-
tions are performed contemporaneously.
While intangible asset valuations prepared for financial
reporting purposes are often done in close proximity to the
movement of intangibles assets within the controlled group,
the transfer pricing regulatory requirements are sufficiently
different than those governing financial reporting, thus yielding
materially different values in most instances.
As such, valuations done for financial reporting pur -
poses should not be relied upon for transfer pricing
purposes. This is not to say however that the two efforts
should not be coordinated. Much can be gained and risks
can be mitigated by such coordination.
Common fact finding and integrated project teams can lead
to significant cost savings and minimize business interruptions.
In addition, a coordinated approach will likely minimize unin-
tended inconsistencies such as the use of different data sources,
inputs and growth assumptions. As discussed, differences in
projections are to be expected, but these differences should be
reconciled against the differing regulatory requirements. Taxing
authorities will likely request and review analyses prepared for
financial reporting purposes and financial auditors will likely
review tax valuations that impact tax provision calculations.
As such, companies should be prepared to bridge the fi-
nancial projections and other inputs and assumptions used for
each purpose. The use of a closely coordinated team has
proven to minimize the effort necessary in creating this bridge.
Nathan Levin is leader of the tax valuation practice at Duff
& Phelps and Jill Weise is the New England leader of Duff &
Phelps’ transfer pricing practice. Both are based in the firm’s
Boston office.
58 JULY/AUGUST 2013•FinancialExecutive
Like the treatment
of buyer-specific synergies,
the right to exploit future
business opportunities
is compensable, and
thus not considered
goodwill, for transfer
pricing purposes.
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