McDermott, Will and Emery has released a detailed look at the divergent paths two approaches to valuing intangibles are taking. The Organization for Economic Co-operation and Development (OECD), as well as tax authorities in some countries, has indicated that “while business valuations may provide a useful starting point for [transfer pricing] analysis, they may not be probative.” The authors cite Xilinx and Veritas as illustrations.
OECD Working Party 6 recently published a discussion draft chapter on intangibles, reiterating that little weight will be given to “the principles established by valuation-industry bodies (such as the International Valuation Standards Council) and international accounting standards bodies (such as the International Accounting Standards Board).” Therein lies the problem, as the revenue authorities of many key countries “commonly assert material deficiencies based on valuation of intangibles that have been transferred to affiliates in low-tax countries … deficiencies [that] often result from a reliance on prior financial valuation studies or concepts borrowed from non-[transfer pricing] disciplines.” That there is this distancing between financial and transfer pricing valuation standards allows multinationals to choose the approach they want to take based on its ultimate effect on their tax rates.
The authors take a position on this, suggesting allowing this drift adds to the controversy. Their solution? Hopefully, over time, the OECD will be mindful of financial valuation principles, but in the here and now, practitioners should reconcile the competing methodologies early on in the process so they are prepared for any challenge based on classic business valuation approaches.