Global BV News: MNE profit shifting puts heat on intangible values

BVWireIssue #159-2
December 9, 2015

The proposed Pfizer-Allergan deal points up the continued trend of multinational companies shifting profits away from the high U.S. corporate tax rates and into countries with lower tax rates. A lot of these deals involve tax inversions, where a company relocates its headquarters to a lower-tax nation, often via a merger. Another way is to use transfer pricing to shift profits to a subsidiary or division located in a lower tax jurisdiction. Intangible assets, such as brands, provide a great deal of revenue, so the transfer of those assets can be used as part of this strategy. Of course, the valuation of those assets that are transferred will affect the level of profits.

BEPS project: An article in Financial Director alerts us that the transfer pricing landscape is under scrutiny by the OECD and the BEPS project. The Organisation of Economic Co-Operation Development (OECD) is currently investigating base erosion and profit shifting (BEPS), which the G20 group is endorsing. These investigations are in place to counteract tax planning strategies that shift profits to low-tax jurisdictions to avoid or pay very little corporate tax. Action 8 of the BEPS plan highlights intellectual property and intangible assets as a particular area of concern.

Because of this, the validation of an intercompany transaction—that is, to confirm that the transaction is consistent with other similar independent transactions—becomes more important. This can be done, for example, by using a third-party data source to examine similar transactions in case of a challenge. The common sources are ktMINE (available from Business Valuation Resources), Royalty Connection, RoyaltySource (AUS Consultants), RoyaltyStat LLC, Licensing Economic Review, License Royalty Rates (Aspen Publishers), Intellectual Property Review (publishes three royalty rate books), and Markables (trademarks and brand names). That way, you can find independent evidence that third parties are agreeing to similar terms and use it to support intercompany transactions. Keep in mind that benchmarking a transaction often requires going beyond the royalty rate information, so having access to actual agreements becomes important.

Even though the shifting of profits may not run afoul of the law, some companies have felt public backlash because of their plans to move their headquarters outside the U.S. The U.S. federal government is exploring ways to prevent this from happening. Some people, however, say that what the government should be doing is fixing the corporate tax code so that this strategy would not be so advantageous.

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