Many predict a strong year for merger and acquisition activity in 2013. If this proves to be the case, there will be an uptick in purchase price allocation analyses (PPAs) and the subsequent impairment testing that follows.
The pick-up in M&A activity will likely also increase the need for valuations for tax purposes as companies work to integrate the acquired company into their existing legal entity structure. All of this raises an important but complicated question: Can an intangible asset valuation done for financial reporting purposes be used for transfer pricing purposes?
After an acquisition, many multinational companies wish to move the ownership of certain acquired intangibles from their current legal entities to other legal entities within the controlled group. This may be done for a host of reasons, including supply chain optimization, improved tax efficiency, the simplification of intercompany transactions and the facilitation of research and development/technology sharing within the group.
The shifting of intangible assets between legal entities within a controlled group falls squarely under the various tax codes and regulations that govern the pricing of such transactions. Most notably, this includes Section 482 of the Internal Revenue Code and its corresponding regulations (Section 482, or the regulations). Section 482 governs the pricing of inter-company transactions in the U.S., which is better known as "transfer pricing." The values determined within the transfer pricing framework vary, often significantly, from the values determined for financial reporting purposes.
According to the regulations, "Allocations or other valuations done for accounting purposes may provide a useful starting point but will not be conclusive for purposes of the best method analysis in evaluating the arm's length charge in a Platform Contribution Transaction (PCT), particularly where the accounting treatment of an asset is inconsistent with its economic value." (A PCT is a buy-in payment required for one cost-sharing participant to buy into another's existing intellectual property and equals the arm's-length value of the contribution).
To understand the Internal Revenue Service's (IRS) reluctance to rely on valuations prepared for financial reporting purposes, one should first look at the differing frameworks underlying each type of analysis. Some attributes of financial reporting analyses include:
* Pursuant to Accounting Standards Codification...