Differences Between Transfer Pricing and Financial Reporting Valuations

The following article, Differences between transfer pricing and financial reporting valuations, originally appeared in the May 2022 issue of The Tax Adviser.

Foreign Income & Taxpayers

Companies today navigate an increasingly complex global tax system, with governments vying to claim a greater share of the global tax revenue pie. According to BDO USA LLP’s 2021 Tax Outlook Survey (April 2021), over 70% of tax executives say their companies’ total tax liability has increased and is expected to continue to do so in the next 12 months. Further, the 2020 Global MNC Tax Complexity Survey (June 2021), which surveys 635 tax consultants from 110 countries around the world, shows that transfer pricing is considered the most complex tax issue facing multinational companies today.

Valuations of intangibles for tax purposes are among the most heavily scrutinized transactions that multinationals engage in. If performed improperly, these valuations can lead to significant income tax adjustments (and penalties), which could, in turn, jeopardize any perceived tax savings associated with an intangible transfer and valuation.

The transfer of intangibles between related parties is often connected to a broader business restructuring or business “event.” Through its life cycle, a company may frequently enter into a transaction that qualifies as a business combination, which is an acquisition of a business or asset(s) that are capable of being conducted or managed as a business. When this occurs, the acquirer is required to prepare a purchase price allocation (PPA) for financial statement reporting purposes that allocates the purchase price of the acquired company to various assets (including identified intangibles and goodwill) and liabilities for financial reporting purposes. Subsequent to a business event, the acquirer may then undergo certain business restructurings, such as a legal entity rationalization exercise, to integrate and simplify its overall tax structure.