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(such as technology, trademarks, and
Valuations of intangibles for tax purposes are customer relationships) are valued as
wasting assets whose value is measured
among the most heavily scrutinized transactions as if development or contributions
that multinationals engage in. were to stop immediately. Sec. 482
states, by contrast, that the income
related to any transfer of intangibles
valuation (such as a PPA) as the transfer transfer-pricing guidelines issued in should be commensurate with the
price of the intangibles? January 2022 by the Organisation for income attributable to the intangible
While the valuation and support Economic Co-operation and Develop- being valued. Further, Sec. 482 refers
required for the intercompany transfer ment (OECD), and similar guidance to Sec. 367(d)(4) regarding the defini-
of intangibles do overlap with finan- issued by virtually all tax administrations tion of the types of intangibles that
cial statement valuations, material around the world. While the starting are compensable, which include good-
differences exist that could have an point for transfer-pricing valuations may will, going concern value, workforce
impact on concluding values, thereby be similar to that for financial statement in place, and any other value that is
increasing a company’s risk to tax and valuations, differences exist in a number not attributable to tangible property
penalty adjustments. The underlying of key areas, as discussed below. or services.
valuation standard for transfer pricing Transfer-pricing valuations For example, the PPA value of
is the arm’s-length standard, which is require identifying and compen- technology software may be based
defined as a price that is consistent with sating each legal entity that eco- solely on the next five years of cash
the results that would have occurred nomically owns the intangibles: flows because a company believes the
if uncontrolled taxpayers had engaged A PPA allocates the purchase price to software will be fully updated and
in the same transaction under the identifiable assets and liabilities, with the replaced by new software code it de-
same circumstances. residual value being goodwill. The PPA velops on its own by year 5. However,
The standard of value for financial is valued for the acquired company as the broader definition of compensable
reporting purposes relies on “fair value,” a whole as of the date of an acquisition intangibles under Sec. 482 could
which is defined as the price that would and thus is agnostic to the legal entity require transfer-pricing valuations to
be received to sell an asset or paid to or entities that own or contribute to the include projected income related to
transfer a liability in an orderly transac- development of the intangibles. future versions of technology — an
tion between market participants at a Transfer-pricing valuations, con- amount embedded in goodwill in the
specific point in time. The difference in versely, must identify and compensate PPA analysis.
valuation standards between financial re- each legal entity that is involved in Further, Sec. 482 requires (and the
porting and transfer pricing leads to the the development or exploitation of the OECD transfer-pricing guidelines
use of different valuation methods for intangibles being valued. It is impor- generally support) the valuation of
each. This may significantly affect the tant to note that Regs. Sec. 1.482-4 intangibles in aggregate if it is deter-
valuation of the asset for transfer-pricing specifies that the owner of intangibles mined that the intangibles are very
purposes. for transfer-pricing purposes is not closely linked. For example, it is not
The remainder of this item focuses necessarily the legal entity that will have uncommon for transfer-pricing valu-
on answering three key questions: rights to any intangible-related income. ations to yield one single intangible
■ What is the issue? This is further highlighted in Regs. Sec. value rather than separate values for
■ Why does it matter? 1.482-1(d)(3)(ii)(B), which states that technology, trademarks, customer rela-
■ What should you do about it? the IRS may disregard contractual terms tionships, and goodwill.
(including legal ownership) if they are The transfer-pricing valuation
The issue inconsistent with the economic sub- must take into account business
The valuation of intangibles for tax stance of the transaction. and economic substance thresh-
purposes must follow specific require- For transfer-pricing purposes, olds that must be satisfied for the
ments related to economic substance, the definition of intangibles and, legal entity to have the rights to
valuation methods, and transfer-pricing thus, what the intercompany the intangibles: Regs. Sec. 1.482-1(d)
documentation, including the U.S. seller should be remunerated for (3)(ii)(B) provides that greater weight is
transfer-pricing regulations under Sec. is different than in a PPA con- put on the actual business and economic
482 of the Internal Revenue Code, the text: In a PPA analysis, intangibles substance of a transaction than on the

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