Price and value

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The issue of transfer pricing has become in recent years the pride and joy of the tax authorities and a challenge for groups. Intensified activities of the OECD - the program BEPS and update TPG, in conjunction with the legislative activity of local tax authorities, generates the need for in-depth analysis of the seemingly well-known concepts and mechanisms, especially in the area of valuation.

Let's look at the process of valuation business unit in terms of new innovative activity. In fact, it amounts to generate the view that currently has the author of valuation, for a stream of potential future rewards incidental to ownership of the business unit and the associated portfolio of intangible assets.

Let us assume that the author of this valuation is preparing objectively valuation report and the result of his work does not support any of the parties to the transaction (eg .: as an expert witness). This will be the evaluation of scenarios of future events that are currently perceived expert. When this perception will change as a result of changes in the conditions of information, it consistently change the result of the measurement, eg .: the next day.

We must therefore distinguish between the two concepts well, "price" - that occurs in the context of determining the financial terms of the transaction and the hypothetical "value" - that occurs in the context of the valuation and determined according to the accepted standard of value.

The valuation of any business unit eg using the DCF method (method of capitalization of future cash flows) does not have a significant association with the process of determining the transaction price of the business unit in a particular market transaction and usually does not. The price depends on many factors that are difficult to take into account in the valuation process, such as: negotiation skills, momentum (the time factor), difficult to quantify synergies, and other emotional factors.

The share prices of public companies are a good example. The so-called intrinsic value of the equity instruments is differently perceived by well-known experts, who often differ by more than 50%. The market price is almost always different from the results of the valuation, and not just for short periods of time but also in the long term, especially under conditions of high volatility events and a significant level of uncertainty.

Determining reasonable prices in internal transactions is carried out in the field governed by the requirements of TPG, now enriched with solutions BEPS (Base Erosion and Profit Shifting). Perhaps it would be appropriate to involve game theory for determining transaction prices in a way that meets the Arms Length Principle?

G20/OECD and BEPS

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The newest OECD carried out "on behalf of" the G20 developing a surprising speed. The beginnings seemed awkward, but the project is alive and well. There is a growing challenge in front of a simple tax optimization. Well, the action generates a reaction, life knows no vacuum, so smart tax advisers' fees will increase.

Intellectual property

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As part of the work on updating the OECD Guidelines, contained inTransfer Pricing Guidelines for Multinational Enterprises and Tax Administrations regarding Chapter VI (intangible assets) have been revised some issues except those covered by the project BEPS.

The instructions contained in Chapter VI, in correspondence with Chapters I-III and IX are critical for the evaluation of the solutions used in capital transactions and licensing, the subject of which are intangible.

In the light of new developments, many of the simple methods of "tax optimization" loses its meaning of existence. Models license fees, which currently are used by related entities in capital groups should be audited, and the new tax projects must already be realized on any changes which, at least in Poland come quickly to the tax regulations.

The second conference on the draft amendments to Chapter VI, published in a document (the Revised Discussion Draft )  held in Paris in July 2013. While in November 2013, held public consultations on the project BEPS  Action plan 8 (intangible assets).

The draft changes proposed in the Action Plan 8 retained many solutions contained in the Revised Discussion Draft and made some records as a brief (highlighted gray background), for which intensive work such as:

  • ownership in the concept of the legal and economic owner, 
  • intangible assets hard to value the transaction date
  • guidelines for the allocation method profit (Profit Split). 

In September of 2014. It was published a new document- Guidance on Transfer Pricing Aspects of Intangibles  

We are watching developments and take an active part in the discussion on the proposed changes because of our main specialization in the valuation of intangible assets and designing models for licensing fees for local and international capital groups.

We invite you to contact us.