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.

US vs GlaxoSmithKline Holdings, September 2006, IR-2006-142

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

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

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

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