Tag: Discounted Cash Flow (DCF)

The discounted cash flow (DCF) model is a method/tool of valuing an asset or business using the concept of the time value of money and risk. Projected future cash flows are estimated and then discounted to present value using the relevant cost of capital (WACC). The sum of all discounted future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value or price of the asset or business in question.

TPG2022 Chapter VI paragraph 6.157

Valuation techniques that estimate the discounted value of projected future cash flows derived from the exploitation of the transferred intangible or intangibles can be particularly useful when properly applied. There are many variations of these valuation techniques. In general terms, such techniques measure the value of an intangible by the estimated value of future cash flows it may generate over its expected remaining lifetime. The value can be calculated by discounting the expected future cash flows to present value. Under this approach valuation requires, among other things, defining realistic and reliable financial projections, growth rates, discount rates, the useful life of intangibles, and the tax effects of the transaction. Moreover it entails consideration of terminal values when appropriate. Depending on the facts and circumstances of the individual case, the calculation of the discounted value of projected cash flows derived from the exploitation of the intangible should be evaluated from the perspectives of both parties to the transaction in arriving at ... Read more

TPG2022 Chapter VI paragraph 6.156

It is not the intention of these Guidelines to set out a comprehensive summary of the valuation techniques utilised by valuation professionals. Similarly, it is not the intention of these Guidelines to endorse or reject one or more sets of valuation standards utilised by valuation or accounting professionals or to describe in detail or specifically endorse one or more specific valuation techniques or methods as being especially suitable for use in a transfer pricing analysis. However, where valuation techniques are applied in a manner that gives due regard to these Guidelines, to the specific facts of the case, to sound valuation principles and practices, and with appropriate consideration of the validity of the assumptions underlying the valuation and the consistency of those assumptions with the arm’s length principle, such techniques can be useful tools in a transfer pricing analysis where reliable comparable uncontrolled transactions are not available. See, however, paragraphs 6.142 and 6.143 for a discussion of the reliability and ... Read more

TPG2022 Chapter VI paragraph 6.155

It is essential to consider the assumptions and other motivations that underlie particular applications of valuation techniques. For sound accounting purposes, some valuation assumptions may sometimes reflect conservative assumptions and estimates of the value of assets reflected in a company’s balance sheet. This inherent conservatism can lead to definitions that are too narrow for transfer pricing purposes and valuation approaches that are not necessarily consistent with the arm’s length principle. Caution should therefore be exercised in accepting valuations performed for accounting purposes as necessarily reflecting arm’s length prices or values for transfer pricing purposes without a thorough examination of the underlying assumptions. In particular, valuations of intangibles contained in purchase price allocations performed for accounting purposes are not determinative for transfer pricing purposes and should be utilised in a transfer pricing analysis with caution and careful consideration of the underlying assumptions ... Read more

TPG2022 Chapter VI paragraph 6.154

Where valuation techniques are utilised in a transfer pricing analysis involving the transfer of intangibles or rights in intangibles, it is necessary to apply such techniques in a manner that is consistent with the arm’s length principle and the principles of these Guidelines. In particular, due regard should be given to the principles contained in Chapters I – III. Principles related to realistically available options, economically relevant characteristics including assumption of risk (see Section D. 1 of Chapter I) and aggregation of transactions (see paragraphs 3.9 to 3.12) apply fully to situations where valuation techniques are utilised in a transfer pricing analysis. Furthermore, the rules of these Guidelines on selection of transfer pricing methods apply in determining when such techniques should be used (see paragraphs 2.1 to 2.12). The principles of Sections A, B, C, and D. 1 of this chapter also apply where use of valuation techniques is considered ... Read more

TPG2022 Chapter VI paragraph 6.153

In situations where reliable comparable uncontrolled transactions for a transfer of one or more intangibles cannot be identified, it may also be possible to use valuation techniques to estimate the arm’s length price for intangibles transferred between associated enterprises. In particular, the application of income based valuation techniques, especially 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 particularly useful when properly applied. 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 ... Read more

TPG2022 Chapter II paragraph 2.175

For instance, where an asset-based profit splitting factor is used, it may be based on data extracted from the balance sheets of the parties to the transaction. It will often be the case that not all the assets of the taxpayers relate to the transaction at hand and that accordingly some analytical work is needed for the taxpayer to draw up a “transactional” balance sheet that will be used for the application of the transactional profit split method. In addition, certain assets, such as self-developed intangibles, may not be reflected on the balance sheet at all, and accordingly must be separately evaluated. In this regard, valuation techniques, such as those based on the discounted value of projected future income streams or cash flows derived from the exploitation of the intangible may be useful. See Section D.2.6.3 of Chapter VI of these guidelines. See also paragraph 2.104 for a discussion of valuation of assets in the context of the transactional net ... Read more
Portugal vs "B Restructuring LDA", February 2021, CAAD, Case No  255/2020-T

Portugal vs “B Restructuring LDA”, February 2021, CAAD, Case No 255/2020-T

B Restructuring LDA was a distributor within the E group. During FY 2014-2016 a number of manufacturing entities within the group terminated distribution agreements with B Restructuring LDA and subsequently entered into new Distribution Agreements, under similar terms, with another company of the group C. These events were directed by the Group’s parent company, E. The tax authorities was of the opinion, that if these transaction had been carried out in a free market, B would have received compensation for the loss of intangible assets – the customer portfolio and the business and market knowledge (know-how) inherent to the functions performed by B. In other words, these assets had been transferred from B to C. The tax authorities performed a valuation of the intangibles and issued an assessment of additional taxable income resulting from the transaction. E Group disagreed with the assessment as, according to the group, there had been no transaktion between the B and C. Furthermore the group ... Read more
Bulgaria vs KEY END ES ENERGY, April 2020, Supreme Administrative Court, Case No 4972

Bulgaria vs KEY END ES ENERGY, April 2020, Supreme Administrative Court, Case No 4972

Key End Es Energy concluded a share purchase and sale agreement of 20.12.2012 with a related party LUKERG BULGARIA GmbH, under which KEY END EU ENERGY transferred to its parent company LUKERG BULGARIA GmbH the ownership of the shares in eight subsidiaries. The subsidiaries owned a total of 15 wind turbines for the production of electricity and operated them on the Bulgarian energy market. According to the Purchase and Sale Agreement the price of the shares were BGN 20 935 937,75. Following an audit of the transaction the tax authorities issued an assessment of additional taxable income for FY 2012 related to the sale of shares. According to the authorities the arm´s length value of the shares were BGN 38 609 215,00. This value was determined based on a CUP/CUT method. As support/sanity check for the valuation the DCF method and the DuPont Analysis was also applied. The additional value was added to the taxable income of Key End Es ... Read more
Norway vs Cytec, March 2019, Borgarting Lagmannsrett, Case No 2017-90184

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 ... Read more
Denmark vs Water Utility Companies, November 2018, Danish Supreme Court, Case No SKM2018.627.HR and SKM2018.635.HR

Denmark vs Water Utility Companies, November 2018, Danish Supreme Court, Case No SKM2018.627.HR and SKM2018.635.HR

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 earned on the activities. However, the decisive factor is the value of these assets for the ... Read more
Report on the Application of Economic Valuation Techniques (2017)

Report on the Application of Economic Valuation Techniques (2017)

The Study on the Application of Economic Valuation Techniques for Determining Transfer Prices of Cross Border Transactions between Members of Multinational Enterprise Groups in the EU provides an overview on how valuation techniques can practically and most efficiently be used for transfer pricing purposes in the EU, particularly for transactions involving intangibles. It investigates the differences between valuations for transfer pricing purposes and valuations for other purposes, and the state of play in terms of experience gathered by EU Member States and trade partners ... Read more
Finland vs. Corp. February 2014, Supreme Administrative Court HFD 2014:33

Finland vs. Corp. February 2014, Supreme Administrative Court HFD 2014:33

A Ltd, which belonged to the Norwegian X Group, owned the entire share capital of B Ltd and had on 18.5.2004 sold it to a Norwegian company in the same group. The Norwegian company had the same day transferred the shares back on to A Ltd. C ASA had also been transferred shares in other companies belonging to the X group. C ASA was listed on the Oslo Stock Exchange in June 2004. Following the transaction with the subsidiary the Tax Office had raised A Ltd’s income for 2004 with 62,017,440 euros on the grounds that the price used in the transaction were considered below the shares’ market value. Further, a tax increase of EUR 620 000 had been applied. A Ltd stated that the purchase price for the shares of B Ltd had been determined on the basis of the company’s net present value, calculated according to a calculation of the present value of cash flows in the B ... Read more
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