Tax valuation is another of our primary service lines. Importantly, we believe that we take a much more thorough, and holistic, approach to tax valuation matters than a typical accounting or valuation firm might.
Legal Entity Valuation
For example, it is not well understood that there is a close relationship between legal entity valuation for tax purposes and transfer pricing theory and regulation. Not only do intercompany transactions directly affect the equity and enterprise values of the legal entities within a multinational corporation by affecting taxable income, but important transfer pricing concepts come into play when examining the value of a legal entity for tax purposes.
Transfer Pricing and Tax Valuations
Indeed, many of the same concepts that are described in the OECD Transfer Pricing Guidelines, Chapter IX (Business Restructurings), are relevant in a tax valuation context. For example, the notion of the “realistically available alternatives” of a legal entity (its “economic substance”), thin capitalization, and passive association value all have a bearing on the standalone enterprise and equity value of a given legal entity, or chain of legal entities, within the multinational enterprise.
Tax Authorities and Legal Entities
This is not just “theory.” Tax authorities, including the IRS, typically deploy transfer pricing economists when examining legal entity valuations that occur in the context of tax restructurings. These economists often approach the question of the enterprise and equity value of a legal entity with much more sensitivity to questions that a typical “valuator” may miss. For example, is the debt on an entity’s balance sheet bona fide debt, in the sense described in §482-2? As another example, do sustained entity losses over the very long run imply that the entity is insolvent, or rather that there is some strategic “option value” associated with the keeping the entity in existence? In our experience, the IRS and other tax authorities bring these and other similar questions – traditionally the province of transfer pricing – to bear in a tax valuation context.
We have deep experience, and provide extensive thought leadership, in the field of tax-related valuation. Our services include tax-restructuring related legal entity valuation, and post-acquisition valuation of legal entities and intangible assets for 1060A, post-acquisition buy-ins, and/or general IP migration purposes.