Category: Valuation – DCF and CUT/CUPs
In transfer pricing, valuation of (intangibles) assets are often based on a prior acquisitions of shares in the relevant business – CUT/CUPs.
In situations where reliable CUP for a transfer of assets cannot be identified, it may also be possible to use valuation techniques to estimate the arm’s length price for assets transferred between associated enterprises.
In particular, the application of income based valuation techniques, premised on the calculation of the discounted value of projected future income streams or cash flows derived from the exploitation of the intangible being valued, may be useful.
Depending on the facts and circumstances, valuation techniques may be used by taxpayers and tax administrations as a part of one of the five OECD transfer pricing methods described in Chapter II, or as a tool that can be usefully applied in identifying an arm’s length price.
Israel vs Broadcom, December 2019, Lod District Court, Case No 26342-01-16
Broadcom Semiconductors Ltd is an Israeli company established in 2001 under the name Dune Semiconductors Ltd. The Company is engaged in development, production, and sale of components to routers, switches etc. The shares in Dune Semiconductors were acquired by the Broadcom Corporation (a US group) in 2009 and following the acquisition intellectual property was transferred to the new Parent for a sum of USD 17 million. The company also entered into tree agreements to provide marketing and support services to a related Broadcom affiliate under a cost+10%, to provide development services to a related Broadcom affiliate for cost+8%, and a license agreement to use Broadcom Israel’s intellectual property for royalties of approximately 14% of the affiliate’s turnover. The tax authorities argued that functions, assets, and risks had been transferred leaving only an empty shell in Israel and a tax assessment was issued based on the purchase price ... Continue to full case
US vs Cavallaro, October 2019, TC Memo 2019-144
Valuation of intangibles in relation to the merger of KT Corp (owned by the parents) and CS Corp (owned by their three sons). In valuing the two companies for the purposes of the merger they incorrectly assumed that CS Corp owned Intangibles that were in fact owned by KT Corp. The Tax Court found, that the valuation of the intangibles reasonably determined the fair market value, and concluded that gifts totaling $22.8 million was transfered to the three sons on December 31, 1995. TC Memo KT 2019-144 US vs. Cavallaro Oct 24 2019 ... Continue to full case
Israel vs Broadcom, Aug 2019, Israeli Supreme Court, Case No 2454/19
In 2012 Broadcom Corporation acquired all the shares of Broadlight Inc, another US corporation which owned a subsidiary in Israel, for around $200 million. Three months later, the subsidiary in Israel sold its IP to a group company for $59.5m and then an agreement was entered according to which the subsidiary would supply R&D, marketing and support services to the other group companies for a cost plus fee. Based on these facts the Israeli tax Authorities issued an assessment equivalent to $168.5m. The tax authorities found that the full value of the company in Israel had been transferred. The tax assessment was brought to court where Broadcom claimed that the tax authorities had re-characterised the transaction and that the onus of proof was on the tax authorities to justify the value of $168.5m. First the District Court held that all the values in the Israeli ... Continue to full case
Norway vs Saipem Drilling Norway AS, August 2019, Borgarting lagmannsrett, Case No LB-2018-55099 – UTV-2019-698
In the Saipem case the Norwegian tax authorities found that the price paid by a related party for an oil rig had not been at arm’s length and issued an assessment. The majority of judges in the Court of Appeal found that the tax assessment was valid. The tax authorities had made sound and well-reasoned assessments and concluded that the price was outside the arm’s length range. According to the decision courts may show reluctance in testing discretionary assessments, thus giving the authorities a reasonable room for pricing transactions where the value is highly uncertain. An appeal of the case to the Supreme Court was not allowed (HR-2019-2428-U). Click here for translation Norway vs Saipem August 2019 ... Continue to full case
US vs Amazon, August 2019, US Court of Appeal Ninth Circut, Case No. 17-72922
In the course of restructuring its European businesses in a way that would shift a substantial amount of income from U.S.-based entities to the European subsidiaries, appellee Amazon.com, Inc. entered into a cost sharing arrangement in which a holding company for the European subsidiaries made a “buy-in” payment for Amazon’s assets that met the regulatory definition of an “intangible.” See 26 U.S.C. § 482. Tax regulations required that the buy-in payment reflect the fair market value of Amazon’s pre-existing intangibles. After the Commissioner of Internal Revenue concluded that the buy-in payment had not been determined at arm’s length in accordance with the transfer pricing regulations, the Internal Revenue Service performed its own calculation, and Amazon filed a petition in the Tax Court challenging that valuation. At issue is the correct method for valuing the preexisting intangibles under the then-applicable transfer pricing regulations. The Commissioner sought ... Continue to full case
Norway vs Normet Norway AS, March 2019, Borgarting Lagmannsrett, Case No 2017-202539
In January 2013 the Swiss company Normet International Ltd acquired all the shares in the Norwegian company Dynamic Rock Support AS (now Normet Norway AS) for a price of NOK 78 million. In February 2013 all intangibles in Dynamic Rock Support AS was transfered to Normet International Ltd for a total sum of NOK 3.666.140. The Norwegian tax authorities issued an assessment where the arm’s length value of the intangibles was set at NOK 58.2 million. The Court of Appeal upheld the tax assessment issued by the tax authorities and rejected the appeal. Click here for translation Norway vs Normet 190319 ... Continue to full case
Norway vs Cytec, March 2019, Borgarting Lagmannsrett, Case No 2017-90184
The question in the case was whether Cytec Norway KS (now Allnex Norway A/S) had paid an arm’s length price for an intra-group transfer of intangible assets in 2010. Cytec Norway KS had set the price for the accquired intangibles at NOK 210 million and calculated tax depreciations on that basis. The Norwegian tax authorities found that no intangibles had actually been transferred. The tax Appeals Committee determined that intangibles had been transferred but only at a total value of NOK 45 million. The Court of appeal upheld the dicision of the Tax Appeals Committee, where the price for tax purposes was estimated at NOK 44.9 million. Click here for translation Norway vs Cytec 19 March 2019, Borgarting Lagmannsrett Case No 2017-90184 ... Continue to full case
Luxembourg vs Lux SARL, December 2018, Administrative Court, Case No 40455
In a case on hidden distribution of profits, the Luxembourg tax authorities stated the following on the issue of valuation methods for intangible assets (a patent): “…the evaluation of an intellectual property right is a rather complex subject; that evaluation reports from “independent” experts in this field are often rather subjective; whereas, therefore, reference should be made to a neutral and recognized body for the evaluation of patents, in this case WIPO, which proposes three different methods of valuation, including (a) the cost method, (b) the revenue method, as well as (c) the market method; that the first method of evaluation is to be dismissed from the outset in view of the absence of research and development expenses reported by the Claimant; that the second method is based on the future revenues of the patent invention; therefore, there must be a large enough amount of data to predict future revenues over ... Continue to full case
Denmark vs Water Utility Companies, November 2018, Danish Supreme Court, Case no 27/2018 and 28/2018
These two triel cases concerned the calculation of the basis for tax depreciation (value of assets) in a number of Danish Water utility companies which had been established in the years 2006 – 2010 in connection with a public separation of water supply and wastewater utility activities. The valuation of the assets would form the basis for the water utility companies’ tax depreciation. The transfer was controlled and subject to Danish arm’s length provisions. The Supreme Court found that the calculation method (DCF) used by the Danish Tax Agency did not provide a suitable basis for calculating the tax value of the transferred assets. The Court stated that for water supply and wastewater treatment it is true that the companies are legaly obligated to provide these facilities and that the governmental regulation of the activity – the “rest in itself” principle – means that no income can be ... Continue to full case
Norway vs. A AS, October 2017, Tax Tribunal, NS 71/2017
A Norwegian company, A, first acquired shares in Company C from a unrelated party D for tNKR 625. Company A then transferred the acquired shares in C to a subsidiary E, a shell company established by C for the purpose of the transaction. Company A then sold the shares in subsidiary E to the unrelated party D, from which it had originally bought the shares in C, for tNKR 3830, a price almost six times higher than the acquisition price, in a tax free transfer. Based on these facts, the Norwegian tax administration adjusted the price of the intra-group transfer shares in C from A to E. The Norwegian tax tribunal decided that the valuation af the shares in the intra-group transfer could be based on a linear appreciation in the share value. Click here for translation Norway vs AS 27 november 2017 SKATTEKLAGENEMDA NS ... Continue to full case
France vs. Havas, July 2017, CE, No 400644
The French Court considers that in the event of a transfer of shares, the goodwill recognized at the acquisition of the shares shall no longer be included in the balance sheet of the parent company. (more…) ... Continue to full case
US vs. Amazon, March 2017, US Tax Court, Case No. 148 T.C. No 8
Amazon is an online retailer that sells products through Amazon.com and related websites. Amazon also sells third-party products for which it receives a commissions. In a series of transactions in 2005 and 2006, Amazon US transferred intangibles to Amazon Europe, a newly established European HQ placed in Luxembourg. A Cost Sharing Arrangement (“CSA”), whereby Amazon US and Amazon Europe agreed to share costs of further research, development, and marketing in proportion to the benefits A License Agreement, whereby Amazon US granted Amazon Europe the right to Amazon US’s Technology IP An Assignment Agreement, whereby Amazon US granted Amazon Europe the right to Amazon US’s Marketing IP and Customer Lists. For these transfers Amazon Europe was required to make an upfront buy-in payment and annual payments according to the cost sharing arrangement for ongoing developments of the intangibles. In the valuation, Amazon had considered the intangibles to have ... Continue to full case
Accenture settles Swiss tax claim for $200m
The Accenture settlement with the Swiss tax authorities results from a significant discrepancy in the valuation of intangibles in a 2010 inter-company transfer from Switzerland to Ireland via Luxembourg that was disclosed in 2014 as a result of Lux Leaks. The Lux Leaks documents show that in the 48 hours it took to complete the inter-company transfer, the value of the intangibles had increased by almost 600 percent from $1.2 billion to $7 billion. In a document to the Luxembourg authorities detailing the tax treatment on the transaction, PwC confirmed the re-evaluation, describing the $7 billion as “fair market value”. Accenture was the first known user of the “CAIA-tax scheme” in a U.S. corporate tax inversion to Ireland. Accenture-2010-Tax-Ruling ... Continue to full case
Luxembourg vs LuxCo TM, December 2015, Administrative Court, Case No 33611
LuxCo TM sold trademarks to a newly established sister company. The price had been set at €975,000. The tax authorities issued an assessment where the price had been set at €6,475,000 and the difference was considered to be hidden profit distribution. The Administrative court ruled in favor of the tax authorities. LuxCo TM’s valuation had been based on wrong facts and assumptions. Click here for translation Lux vs Luxco 10 dec 2015 33611 ... Continue to full case
Sweden vs Ferring AB, June 2011, Swedish Court, Case no 2627-09
In connection with a restructuring, Ferring Sweden (a Scandinavian pharmaceutical) had transferred intangible assets to a group company in Switzerland. Among the assets transferred was an exclusive worldwide license to manufacture and sell a drug and a number of ongoing R&D projects. The question in the case was whether the price agreed between the Group companies was consistent with the arm’s length principle. The Ferring’s position was that the price was consistent with the arm’s length principle, while the Swedish Tax Agency believed that an arm’s-length price was significantly higher. In support of its pricing, the company had submitted a valuation made by the audit company A, where the value of Ferring after the transfer (the residual company) was compared with the value of the company if it had continued to operate as a full-fledged company (the original company). These values were determined through a ... Continue to full case
US vs. Veritas Software Corporation, December 2009
The issue in the VERITAS case involved the calculation of the buy-in payment under VERITAS’ cost sharing arrangement with its Irish affiliate. VERITAS US assigned all of its existing European sales agreements to VERITAS Ireland. Similarly,VERITAS Ireland was given the rights to use the covered intangibles and to use VERITAS US’s trademarks, trade names and service marks in Europe, the Middle East and Africa, and in Asia-Pacific and Japan. In return, VERITAS Ireland agreed to pay royalties to VERITAS US in exchange for the rights granted. The royalty payment included a prepayment amount (i.e. lump-sum payment) along with running royalties that were subject to revision to maintain an arm’s length rate. Thereafter, VERITAS Ireland began co-developing, manufacturing and selling VERITAS products in the Europe, the Middle East and Africa markets as well as in the Asia-Pacific and Japan markets. These improvements, along with the establishment of new ... Continue to full case
US vs GlaxoSmithKline Holdings, September 2006, IR-2006-142
In September 2006 the Internal Revenue Service announced that it has successfully resolved a transfer pricing dispute with Glaxo SmithKline. Under the settlement agreement, GSK will pay the Internal Revenue Service approximately $3.4 billion, and will abandon its claim seeking a refund of $1.8 billion in overpaid income taxes, as part of an agreement to resolve the parties’ long-running transfer pricing dispute for the tax years 1989 through 2005. See also the GlaxoSmithKlein decision from july 2001 The IRS announcement US glaxosmithkline_no_5750-04_2006-irs__settlement ... Continue to full case
US vs. DHL. April 2002, U.S. Court of Appeals
When DHL sold the “DHL” trademark to DHL International, the IRS disagreed with DHL’s evaluation of the arms-length price of the intellectual property and used its authority under Section 482 to reallocate income and impose penalties. DHL appealed the IRS ruling and the tax court upheld the IRS allocation to DHL. In this decision the U.S. Court of Appeals for the Ninth Circuit affirmed the tax court’s application of Section 482 to the sale of the trademark and the $100 million valuation for the intangible asset, but reversed the tax court’s rejection of a $50 million value of the foreign trademark rights, as asserted by DHL. DHL April 11 2002 United States Court of Appeals And the prior decision of the Tax Court US-vs.-DHL.TCM_.WPD ... Continue to full case
US vs NESTLE HOLDINGS INC, July 1998, Court of Appeal, 2nd Circuit, Docket Nos 96-4158 and 96-4192
In this case, experts had utilized the relief-from-royalty method in the valuation of trademarks. On this method the Court noted: “In our view, the relief-from-royalty method necessarily undervalues trademarks. The fair market value of a trademark is the price a willing purchaser would have paid a willing seller to buy the mark…The relief-from-royalty model does not accurately estimate the value to a purchaser of a trademark. Royalty models are generally employed to estimate an infringer’s profit from its misuse of a patent or trademark… Resort to a royalty model may seem appropriate in such cases because it estimates fairly the cost of using a trademark… However, use of a royalty model in the case of a sale is not appropriate because it is the fair market value of a trademark, not the cost of its use, that is at issue. A relief-from-royalty model fails to ... Continue to full case
Georgia Pacific Corp vs. United States Plywood Corp, May 1970
This case is about valuation (not transfer pricing as such) and is commonly referred to in international valuation practice. In this decisions, the following 15 factors were relied upon to determine the type of monetary payments that would compensate for a patent infringement: 1. The royalties received by the licensor for licensing the intangible, proving or tending to prove an established royalty. 2. The rates paid by the licensee for the use of other similar intangibles. 3. The nature and scope of the license, such as whether it is exclusive or nonexclusive, restricted or non-restricted in terms of territory or customers. 4. The licensor’s policy of maintaining its intangible monopoly by licensing the use of the invention only under special conditions designed to preserve the monopoly. 5. The commercial relationship between the licensor and licensees, such as whether they are competitors in the same territory ... Continue to full case