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TAX CLINIC

contractual arrangement itself. A transfer adjustments, noncompliance with If taxpayers have failed in the past
of intangibles to a related party has busi- tax rules regarding valuations of IP to recognize the differences between
ness purpose if there is a nontax purpose transfers can also result in the transfer-pricing valuations and financial
for the transaction. This may include application of penalties to the adjust- statement valuations, they should
transferring intangibles to a non-U.S. re- ments (which can be up to 40% on a engage transfer-pricing experts to do a
gional headquarters because it will drive gross valuation misstatement under risk assessment and develop corrective
the decision-making and future success U.S. rules) and potential double strategies going forward. For example,
of the business. Further, economic sub- taxation. A company’s tax provision if it is determined that, after an IP
stance exists if the purchaser has the ca- may also be affected. migration, a specific jurisdiction lacks
pacity to own and exploit the intangibles ■ Tax optimization risk: Incorrect sufficient economic substance from a
(through its own workforce). valuation approaches can yield transfer-pricing perspective, then certain
Similarly, the OECD transfer-pricing reduced tax savings, misstatements of DEMPE functions and personnel
guidelines have adopted the DEMPE taxable income, and increased time may be moved to that jurisdiction to
framework that focuses on the develop- spent responding to tax authority mitigate risks. Furthermore, such a risk
ment, enhancement, maintenance, pro- inquiries and audits and on requests assessment also helps with a requirement
tection, and exploitation of intangibles. for competent authority relief. in the regulations under Sec. 482 for
The DEMPE framework intends to ■ Reputational risk: Valuations for tax taxpayers to examine annually the
ensure that profits (or value) align with transactions can impose a risk to a actual vs. projected results after a
the legal entities that in substance create company’s reputation if a tax contro- transfer/license of intangible property
economic value for a company. versy spills into the public domain. and to ensure that the valuation is
Other differences between financial This negative publicity can have an “commensurate with income.”
statement and transfer-pricing impact on the company’s reputation Taxpayers who frequently undertake
valuations are beyond the scope of as a contributor to local markets and valuation exercises (for example, due
this item but should be considered as economies by paying its “fair share” to acquisitions and restructuring)
part of a robust analysis. Taxpayers of taxes. will benefit from keeping a valuation
and practitioners are encouraged playbook/checklist that includes
to discuss these issues with Potential solutions transfer-pricing considerations among
transfer-pricing experts. Being proactive in addressing the other considerations. Such taxpayers
risks of misstated valuation in should make transfer pricing an integral
Why it matters business, financial reporting, and part of their strategy and planning
When clients lack sufficient or accurate tax is the most effective approach to discussion.
support for these often high-risk/high- preventing surprises. The OECD Taxpayers should recognize the
profile transactions involving the trans- transfer-pricing guidelines recognize transfer-pricing risks and opportunities
fer of intangibles between related parties, this and highlight in ¶6.29 that inherent in intangibles valuations. In
the risk to their companies can come in “accounting valuations and information most cases, the best course of action is
many forms. supporting such valuations can provide as simple as involving transfer-pricing
Some of these risks include: a useful starting point in conducting a professionals early in the process (at
■ Compliance risk: Regs. Sec. 1.482-4(f) transfer pricing analysis.” Areas where strategy and planning meetings).
(2) and ¶6.155 of the OECD these different types of valuations Given the growing number of
transfer-pricing guidelines expressly converge include financial projections, transfer-pricing controversies globally
state that financial reporting valua- discount rates (or reconciliation to and the changing transfer-pricing
tions should not be used for transfer- overall discount rates), general business landscape in many countries, it
pricing purposes. For example, using descriptions, and a description of the is more important now than ever
intangible values calculated for a PPA business event. The overlap between before to ensure that the transfer of
for transfer-pricing purposes tends to some aspects of financial reporting and intangibles is appropriately analyzed in
understate the value of the acquired transfer-pricing valuation methodologies accordance with transfer-pricing rules
intellectual property (IP) and can provides an opportunity for streamlined and regulations.
leave the transaction open to an audit information and data gathering. From Steve Cullimore, Seattle; Rod
adjustment. This will result in time and cost Koborsi, San Jose, Calif.; Anil Somani,
■ Penalty risk: In addition to leaving savings for management and Ph.D., Dallas; Sean Turner, Ph.D.,
transactions vulnerable to audit operational personnel. Seattle; and Joe Wood, Houston

18 May 2022 The Tax Adviser