Tag: Valuation

Airbnb under examination by the Internal Revenue Service for 2013 and 2016

Airbnb under examination by the Internal Revenue Service for 2013 and 2016

Airbnb is under examination by the Internal Revenue Service for its income taxes in 2013 and 2016, according to the company’s December 2020 SEC filing. According to the filing a draft notice of adjustment from the IRS proposes that the company owes an additional $1.35 billion in taxes plus interest and penalties for the years in question. The assessment is related to valuation of its intellectual property that was transferred to a subsidiary in FY 2013. Airbnb then had had two subsidiaries outside the United States – Airbnb International Holdings Ltd and Airbnb International Unlimited Co – both resident for tax purposes in tax haven Jersey. The company plans to fight a potential adjustment. “We disagree with the proposed adjustment and intend to vigorously contest it,” “If the IRS prevails in the assessment of additional tax due based on its position and such tax and related interest and penalties, if any, exceeds our current reserves, such outcome could have a material ... Continue to full case
India vs. M/s Redington (India) Limited, December 2020, High Court of Madras, Case No. T.C.A.Nos.590 & 591 of 2019

India vs. M/s Redington (India) Limited, December 2020, High Court of Madras, Case No. T.C.A.Nos.590 & 591 of 2019

Redington India Limited (RIL) established a wholly-owned subsidiary Redington Gulf (RG) in the Jebel Ali Free Zone of the UAE in 2004. The subsidiary was responsible for the Redington group’s business in the Middle East and Africa. Four years later in July 2008, RIL set up a wholly-owned subsidiary company in Mauritius, RM. In turn, this company set up its wholly-owned subsidiary in the Cayman Islands (RC) – a step-down subsidiary of RIL. On 13 November 2008, RIL transferred its entire shareholding in RG to RC without consideration, and within a week after the transfer, a 27% shareholding in RC was sold by RG to a private equity fund Investcorp, headquartered in Cayman Islands for a price of Rs.325.78 Crores. RIL claimed that the transfer of its shares in RG to RC was a gift and therefore, exempt from capital gains taxation in India. It was also claimed that transfer pricing provisions were not applicable as income was exempt from ... Continue to full case
France vs SA Sacla, February 2020, CAA de Lyon, Case No. 17LY04170

France vs SA Sacla, February 2020, CAA de Lyon, Case No. 17LY04170

SA Sacla, a French company trading in protective clothing and footwear, as well as small equipment, was audited for fiscal years 2007, 2008 and 2009. The French tax administration issued an assessment, considering that SA Sacla by selling brands owned by it for an amount of 90,000 euros to a Luxembourg company, Involvex, had indirectly transfered profits abroad. Due to inconclusive results of various valuations presented by the tax authorities and the taxpayer, an expert opinion was ordered by the Court on the question of whether the price of the brands sold by SA Sacla to the company Involvex had been at arm’s length. DECIDES: Article 1: Before ruling on the request of SA SACLA, an expert will carry out an assessment in order to determine whether the selling price of the brands sold by SA SACLA corresponds to their value, taking into account the exemption payment of royalties for a period of 5 years granted by the company Involvex ... Continue to full case
Israel vs Broadcom, December 2019, Lod District Court, Case No 26342-01-16

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 for the shares resulting in additional taxes of USD 29 millions. According to the ... Continue to full case
US vs Cavallaro, October 2019, TC Memo 2019-144

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
Norway vs Saipem Drilling Norway AS, August 2019, Borgarting lagmannsrett, Case No LB-2018-55099 – UTV-2019-698

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

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 to include all intangible assets of value, including “residual-business assets” such as Amazon’s culture of ... Continue to full case
Uruguay vs Philips Uruguay S.A., July 2019, Tribunal de lo Contencioso Administrativo, Case No 456/2019

Uruguay vs Philips Uruguay S.A., July 2019, Tribunal de lo Contencioso Administrativo, Case No 456/2019

In 2013, Philips Uruguay S.A. agreed to sell of its business division related to the marketing of audio and video products to another entity within the group, Woox Innovations Sucursal Uruguay. The related parties had agreed on a price of USD 2,546,409. Philips Uruguay, had not include the transaction in its transfer pricing documentation as – according to the company – the transfer pricing regime in Uruguay was only applicable to transactions involving different jurisdictions (transactions with foreign entities) – unless the domestic transactions were between local entities taxed under different local tax regimes. The tax administration disagreed that purely domestic transactions were not subject for to transfer pricing rules in Uruguay. They also disagreed with the arm’s length nature of the agreed price of USD 2.546.409 and instead estimated an arm’s length value of USD 5,063,294. Consequently, an assessment was issued resulting in an additional tax of USD 630.000. Philips Uruguay disagreed with the assessment and brought the case ... Continue to full case
Luxembourg vs Lux SARL, December 2018, Administrative Court, Case No 40455

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 the life of the patent, which is not the case here, as the tax dispute ... Continue to full case
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 ... Continue to full case

TPG2018 Chapter II paragraph 2.179

Asset-based or capital-based profit splitting factors can be used where there is a strong correlation between tangible assets or intangibles, or capital employed and creation of value in the context of the controlled transaction. In order for a profit splitting factor to be meaningful, it should be applied consistently to all the parties to the transaction. See paragraph 2.104 for a discussion of comparability issues in relation to asset valuation in the context of the transactional net margin method, which is also valid in the context of the transactional profit split method. Example 15 in Annex II to this chapter illustrates the principles of this section ... Continue to full case

TPG2018 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 ... Continue to full case
TPG2017 Chapter VI Annex example 29

TPG2017 Chapter VI Annex example 29

104. Pervichnyi is the parent of an MNE group organised and doing business in country X. Prior to Year 1, Pervichnyi developed patents and trademarks related to Product F. It manufactured Product F in country X and supplied the product to distribution affiliates throughout the world. For purposes of this example assume the prices charged to distribution affiliates were consistently arm’s length. 105. At the beginning of Year 1, Pervichnyi organises a wholly owned subsidiary, Company S, in country Y. In order to save costs, Pervichnyi transfers all of its production of Product F to Company S. At the time of the organisation of Company S, Pervichnyi sells the patents and trademarks related to Product F to Company S for a lump sum. Under these circumstances, Pervichnyi and Company S seek to identify an arm’s length price for the transferred intangibles by utilising a discounted cash flow valuation technique. 106. According to this valuation analysis, Pervichnyi could have generated after ... Continue to full case
TPG2017 Chapter VI Annex example 28

TPG2017 Chapter VI Annex example 28

101. Company A is the Parent company of an MNE group with operations in country S. Company B is a member of the MNE group with operations in country T, and Company C is also a member of the MNE group with operations in country U. For valid business reasons the MNE group decides to centralise all of its intangibles related to business conducted outside of country S in a single location. Accordingly, intangibles owned by Company B are sold to Company C for a lump sum, including patents, trademarks, know-how, and customer relationships. At the same time, Company C retains Company B to act as a contract manufacturer of products previously produced and sold by Company B on a full-risk basis. Company C has the personnel and resources required to manage the acquired lines of business, including the further development of intangibles necessary to the Company B business. 102. The MNE group is unable to identify comparable uncontrolled transactions ... Continue to full case
TPG2017 Chapter VI Annex example 27

TPG2017 Chapter VI Annex example 27

97. Company A is the Parent of an MNE group with operations in country X. Company A owns patents, trademarks and know-how with regard to several products produced and sold by the MNE group. Company B is a wholly owned subsidiary of Company A. All of Company B’s operations are conducted in country Y. Company B also owns patents, trademarks and know-how related to Product M. 98. For sound business reasons related to the coordination of the group’s patent protection and anti-counterfeiting activities, the MNE group decides to centralise ownership of its patents in Company A. Accordingly, Company B sells the Product M patents to Company A for a lump-sum price. Company A assumes responsibility to perform all ongoing functions and it assumes all risks related to the Product M patents following the sale. Based on a detailed comparability and functional analysis, the MNE group concludes that it is not able to identify any comparable uncontrolled transactions that can be ... Continue to full case
TPG2017 Chapter VI Annex example 23

TPG2017 Chapter VI Annex example 23

83. Birincil acquires 100% of the equity interests in an independent enterprise, Company T for 100. Company T is a company that engages in research and development and has partially developed several promising technologies but has only minimal sales. The purchase price is justified primarily by the value of the promising, but only partly developed, technologies and by the potential of Company T personnel to develop further new technologies in the future. Birincil’s purchase price allocation performed for accounting purposes with respect to the acquisition attributes 20 of the purchase price to tangible property and identified intangibles, including patents, and 80 to goodwill. 84. Immediately following the acquisition, Birincil causes Company T to transfer all of its rights in developed and partially developed technologies, including patents, trade secrets and technical know-how to Company S, a subsidiary of Birincil. Company S simultaneously enters into a contract research agreement with Company T, pursuant to which the Company T workforce will continue to ... Continue to full case
TPG2017 Chapter VI Annex example 22

TPG2017 Chapter VI Annex example 22

78. Company A owns a government licence for a mining activity and a government licence for the exploitation of a railway. The mining licence has a standalone market value of 20. The railway licence has a standalone market value of 10. Company A has no other net assets. 79. Birincil, an entity which is independent of Company A, acquires 100% of the equity interests in Company A for 100. Birincil’s purchase price allocation performed for accounting purposes with respect to the acquisition attributes 20 of the purchase price to the mining licence; 10 to the railway licence; and 70 to goodwill based on the synergies created between the mining and railway licences. 80. Immediately following the acquisition, Birincil causes Company A to transfer its mining and railway licences to Company S, a subsidiary of Birincil. 81. In conducting a transfer pricing analysis of the arm’s length price to be paid by Company S for the transaction with Company A, it ... Continue to full case

TPG2017 Chapter IX paragraph 9.62

Difficulties can arise in the context of business restructuring where the valuation of an intangible or rights in an intangible at the time of the transaction is highly uncertain. In these cases, the question arises as to how arm’s length pricing should be determined. The question should be resolved, both by taxpayers and tax administrations, by reference to what independent enterprises would have done in comparable circumstances to take account of the valuation uncertainty in the pricing of the transaction. To this aim, the guidance in Section D.3 of Chapter VI is relevant ... Continue to full case

TPG2017 Chapter IX paragraph 9.56

The determination of the arm’s length price for a transfer of intangibles or rights in intangibles should be conducted in accordance with the guidance in Section D. 1 of Chapter VI. It will be affected by a number of factors among which are the amount, duration and riskiness of the expected benefits from the exploitation of the intangible, the nature of the intangible right and the restrictions that may be attached to it (restrictions in the way it can be used or exploited, geographical restrictions, time limitations), the extent and remaining duration of its legal protection (if any), and any exclusivity clause that might be attached to the right. See Section D.2. 1 of Chapter VI. Valuation of intangibles can be complex and uncertain. The general guidance on intangibles and on cost contribution arrangements that is found in Chapters VI and VIII is applicable in the context of business restructurings ... Continue to full case

TPG2017 Chapter VI paragraph 6.178

Where the purpose of the valuation technique is to isolate the projected cash flows associated with an intangible, it may be necessary to evaluate and quantify the effect of projected future income taxes on the projected cash flows. Tax effects to be considered include: (i) taxes projected to be imposed on future cash flows, (ii) tax amortisation benefits projected to be available to the transferee, if any, and (iii) taxes projected to be imposed on the transferor as a result of the transfer, if any ... Continue to full case
Loading...