Winter 2015
Focus on Intercompany Transfer Price and Other Income Tax Insights
Editor for This Issue: John C. Ramirez Intercompany Transfer Price InsightsThought Leadership::
Transfer Pricing Audits under the New IRS Roadmap and Disputing Proposed Adjustments
Robert C. Morris, Esq., and Richard L. Hunn, Esq.
Transfer prices can be an effective part of corporate tax planning for multinational
taxpayers. Legal counsel and their economic advisers should be aware of the Service’s
current approach to transfer pricing audits and of the avenues for disputing any proposed
transfer price adjustments.
Advance Pricing Agreements: The What, Why, and How from the Valuation Analyst Perspective
Justin M. Nielsen
Intercompany transfer pricing continues to be a significant income tax issue facing
multinational corporations. This has led to the increased popularity of advance pricing
agreements. An advance pricing agreement (APA) is a prospective arrangement negotiated
between a taxpayer and the appropriate tax authority that confirms the proper transfer
pricing method used in an intercompany property or service transfer transaction. An APA
can help minimize the risk of tax authority penalties related to an intercompany property or
service transaction. The valuation analyst can provide significant value to a multinational
taxpayer by assisting with the development and negotiation of an APA with the proper tax
authority. This discussion focuses on the mechanics and recent popularity of an APA, and
provides guidance as to the role the analyst can play in assisting in the APA process.
Important Considerations in the Pricing of Intercompany Loans and Financial Guarantees
Matt C. Courtnage
Over the past several years, taxing authorities have devoted increasing attention to
intercompany loans and financial guarantees in terms of their tax treatment and pricing
considerations. This attention is especially evident in the international arena, where crossborder
financial transactions involving loan rates and guarantee fees can lead to profit
erosion. For these intercompany financial transactions, there is a great deal of complexity
for both the taxpayer and the national taxing authority in determining a reasonable arm’s
length transfer price. This discussion considers how the arm’s-length standard is applied in
the pricing of intercompany loans and financial guarantees, while recognizing the inherent
benefits that come from being part of a multinational company.
The Impact of the Standard of Value on Transfer Pricing and Financial Accounting in the United States
Stephen P. Halligan
Tangible property and intangible property are valued in a variety of different contexts and
for a variety of different reasons. As such, multiple standards of value have developed, not
all of which yield equivalent results for the same property. One context in which tangible
property and intangible property are valued is income-tax-related intercompany transfer
pricing. In estimating a value for tangible property and intangible property in this transfer
pricing context, the analyst should understand the nuances of the arm’s-length price
standard and how it differs from the fair value and fair market value standards of value.
This discussion (1) provides an overview of the different standards of value used for financial
reporting and tax-related transfer pricing purposes and (2) analyzes the similarities and
differences between fair value and the arm’s-length price standard of value.
The Scrutiny of Executive Compensation
Irina V. Borushko and Lisa H. Tran
The reasonableness of shareholder/employee compensation in a closely held corporation
is an important, and often controversial, issue for income tax purposes. Sometimes,
owner/executive compensation may be disguised as a management fee, consulting
fee, bonus, or “catch-up” payment. In whatever form the executive compensation is
reported, closely held company owners often rely on valuation analysts to help them
estimate a reasonable level of executive compensation in order to minimize the risk
of being audited by the Internal Revenue Service. This discussion (1) reviews federal
statutes and judicial precedent regarding reasonable compensation and (2) summarizes
some of the owner/executive compensation issues from recent judicial decisions.
A Review of BMC Software, Inc. v. Commissioner of Internal Revenue: Should Intercompany Accounts Receivable Be Considered “Debt”?
Samuel S. Nicholls
The matter of BMC Software, Inc. v. Commissioner, tried before the U.S. Tax Court,
involved (1) the BMC repatriation of foreign funds through the Internal Revenue Code
Section 965 repatriation tax holiday and (2) the subsequent distinction between relatedparty
accounts receivable and related-party debt that resulted from a 2007 transfer pricing
settlement between BMC and the Internal Revenue Service. This discussion (1) describes
the facts of the case, (2) explains the Tax Court’s reasoning behind its decisions, and (3)
concludes with commentary on the unanswered questions raised as a result of this case.
Intangible Property in Transfer Pricing Analyses
Aaron M. Rotkowski
When a multinational corporation develops and owns intangible property that is used by
its foreign subsidiaries, an arm’s-length intercompany transfer price should be established
as a charge for the use of the intangible property. The identification of intangible property
transferred between related entities is often challenging because of (1) the interconnected
relationship between multinational subsidiaries and (2) the broadly defined definition and
interpretation of intangible property by taxing authorities. This discussion provides (1) a
time line of events that have contributed to the current status of intangible property transfer
pricing policy in the United States and abroad and (2) guidance for the identification of
intangible property in intercompany transfer pricing analyses.
Best Practices:
The Valuation of Trademark-Related Intangible Property
Robert C. Morris, Esq., and Richard L. Hunn, Esq.
Valuation analysts are often called on to perform valuation, damages, and transfer price
analyses of trademark-related intangible property for various purposes. This discussion
describes the valuation of trademarks within the context of both financial accounting
and income tax accounting (in particular, tax-related intercompany transfer pricing). This
discussion summarizes the generally accepted trademark analysis approaches and methods,
particularly within the context of financial accounting and tax-related transfer price
analysis. And, this discussion presents three examples, using different analytical methods, to
illustrate the analysis of trademarks.
Estimating Intercompany Transfer Price Trademark Royalty Rates
John C. Ramirez
Valuation analysts are often called on to estimate an arm’s-length price trademark
royalty rate as part of a tax-related intercompany transfer price analysis. This discussion
summarizes the regulations that govern transfer pricing for federal income tax purposes,
and it describes the factors that analysts and (other transfer pricing practitioners) often
consider when estimating intercompany transfer price royalty rates. This discussion focuses
on the methods and procedures used to estimate a trademark royalty rate and on the
facts and circumstances that affect the pricing of trademark royalty rates for tax-related
intercompany transfer price purposes.
Structuring the Intangible Property Forensic Analysis Assignment
Robert F. Reilly, CPA
Valuation analysts are often called on to perform damages, valuation, royalty rate, arm’slength
transfer price, remaining useful life, and various other forensic analyses related to
commercial intangible property. There are 10 common elements, or stages, involved in
most intangible property forensic analyses. This discussion summarizes these 10 intangible
property forensic analysis assignment elements.