Multinational corporations employ various strategies to reap tax benefits both
domestically and internationally. A fair market valuation is often essential to
the execution of such strategies. In this issue of the Alert, we highlight some
of the strategies frequently used by multinationals.
Reorganizations
Corporate reorganizations can take the form of transfers of assets for stock
or stock for stock. Both tax bases and fair market value of stock and assets
transferred are required for proper reporting of these transactions under
Internal Revenue Code (IRC) Section 367. Our valuation analyses can support both
the tax-free treatment and proper tracing of tax attributes of the parties to
the reorganization.
I.R.C.Section 338 - Foreign Tax Credit Planning
Sec. 338 elections are typically used for U.S. dividend planning. The
stepped-up tax bases are used for increased depreciation and amortization
deductions in the computation of U.S. earnings and profits. U.S. earnings and
profits decrease while foreign taxes stay the same. As a result, foreign tax
credit is accelerated. Our valuation analyses establish the stepped-up inside
basis of the assets to provide the starting point for the U.S. tax earnings and
profits calculation.
Transfer Pricing
Multinational companies face several compliance and planning issues in
addressing the worldwide arms-length standards applicable to intercompany
transfer pricing. Valuation analyses are integral to a worldwide transfer
pricing strategy, particularly the proper valuation of IP for purposes of
setting up a supportable royalty, tech fee, or other charges for access to the
IP. In addition, economic analysis to determine the appropriate transfer pricing
methodology is required to avoid underpayment penalties.Check-the-Box
A check-the-box (CTB) entity classification election is permitted under U.S.
tax law. This election to disregard the legal entity results in a deemed
liquidation of the electing legal entity. In a liquidation, the stock of the
legal entity is retired and the shareholders take over its assets and
liabilities. The company is deemed to have sold its assets and liabilities for
fair market value to the shareholders in return for their stock in the company.
The shareholders are deemed to have sold their stock in the company in return
for the fair market value of the assets and liabilities. A valuation is needed
in order to determine the tax consequences of the liquidation and to establish
the tax bases and capital accounts of the new legal entity.
Fair Market Valuation Election Under Section 1.861-9T(g)
For purposes of computing a U.S. taxpayer’s allowable foreign tax credit,
Section 864 (e) requires that interest expense deducted on the U.S. tax return
be allocated and apportioned to U.S. and foreign source income. This generally
adversely affects the allowable foreign tax credit since it results in an
increased amount of interest expense being apportioned to foreign income and
thus away from U.S. income. The U.S. taxpayer can elect to use fair market
valuation (rather than tax book value) to determine the relative value of the
U.S. and foreign assets under the pertinent provisions of Section 1.861-9T(g) of
the Tax Regulations. This election is particularly advantageous in situations
involving U.S.-based intangible property with high fair market value but low or
no tax book value.
Case Studies
VRC has been involved in over 2,000 tax-related engagements. Here is a
sampling of some of the engagements we have completed:
• A multinational decided to utilize a check-the-box
election for some
of its poorly operating entities in Germany. We valued
the equity of
nine subsidiaries in Germany in support of the
check-the-box
election.
• A well-known bottling company with operations in
the United
States and overseas transferred assets to a country in
a lower tax
jurisdiction. The idea behind this strategy is that
even though the
company pays a one-time capital gains tax, in the long
run the tax
savings gained by utilizing this tax strategy make up
for the one-
time tax. To support this tax strategy, we provided a
fair market
valuation of the assets being transferred.
• A technology company engaged us to determine
appropriate arm’s
length royalty rates for intellectual property under
I.R.C. Section
482 for transfer pricing. The arm’s length range of
royalty rates
provided a supportable basis for transfer prices
between the
Company’s U.S. (parent) reporting unit and multiple
overseas
domiciled subsidiaries.
• For a multinational which manages a portfolio of
energy
businesses we provided a fair value of the assets
domiciled in the
United States and abroad for allocation of interest
expense in
accordance with I.R.C. Section 864 (e) and Regulation
Section
1.861-9T(g).
• We valued several overseas entities of a
multinational supplier of
analytical instruments, laboratory equipment and
software for tax
planning purposes.
For more information regarding tax-related services, contact your Valuation
Research representative or Dick Nordberg at 414-221-6220. VR
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