The projected useful life of particular intangibles is a question to be determined on the basis of all of the relevant facts and circumstances. The useful life of a particular intangible can be affected by the nature and duration of the legal protections afforded the intangible. The useful life of intangibles also may be affected by the rate of technological change in the industry, and by other factors affecting competition in the relevant economic environment. See paragraphs 6.121 and 6.122.
TPG2022 Chapter VI paragraph 6.175
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By OECD
Category: OECD Transfer Pricing Guidelines (2022), TPG2022 Chapter VI: Special Considerations for Intangibles | Tag: Discounted Cash Flow (DCF), Intangibles, Useful life, Valuation, Valuation method, Valuation technique
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- TPG2022 Chapter VI paragraph 6.176In some circumstances, particular intangibles may contribute to the generation of cash flow in years after the legal protections have expired or the products to which they specifically relate have ceased to be marketed. This can be the case in situations where one generation of intangibles forms the base for...
- TPG2022 Chapter VI paragraph 6.174Valuation techniques are often premised on the projection of cash flows derived from the exploitation of the intangible over the useful life of the intangible in question. In such circumstances, the determination of the actual useful life of the intangible will be one of the critical assumptions supporting the valuation...
- TPG2022 Chapter VI paragraph 6.161It may be relevant in assessing the reliability of a valuation model to consider the purposes for which the valuation was undertaken and to examine the assumptions and valuation parameters in different valuations undertaken by the taxpayer for non-tax purposes. It would be reasonable for a tax administration to request...
- TPG2022 Chapter VI paragraph 6.157Valuation 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...
- TPG2022 Chapter II paragraph 2.175For 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...
- TPG2022 Chapter VI paragraph 6.178Where 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...
- TPG2022 Chapter VI paragraph 6.177In this regard, where specific intangibles contribute to continuing cash flows beyond the period for which reasonable financial projections exist, it will sometimes be the case that a terminal value for the intangible related cash flows is calculated. Where terminal values are used in valuation calculations, the assumptions underlying their...
- TPG2022 Chapter VI paragraph 6.173Since certain risks can be taken into account either in arriving at financial projections or in calculating the discount rate, care should be taken to avoid double discounting for risk....
- TPG2022 Chapter VI paragraph 6.172It should be recognised in determining and evaluating discount rates that in some instances, particularly those associated with the valuation of intangibles still in development, intangibles may be among the most risky components of a taxpayer’s business. It should also be recognised that some businesses are inherently more risky than...
- TPG2022 Chapter VI paragraph 6.171There is no single measure for a discount rate that is appropriate for transfer pricing purposes in all instances. Neither taxpayers nor tax administrations should assume that a discount rate that is based on a Weighted Average Cost of Capital (WACC) approach or any other measure should always be used...
Supplemental Guidance
- EU – JTPF 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...
- EU Study on the Application of Economic Valuation Techniques (2016)Application of Economic Valuation Techniques for Determining Transfer Prices of Cross Border Transactions....