Understanding Tax Amortization Benefit Considerations and the International Impact

By: Mercedes Falcon

(Estimated reading time: 3 minutes)

The article in brief:

  • When valuing a foreign company and its intangible assets, the specific tax provisions applicable to the company’s country location and the impact on values often go unnoticed.
  • Acquisition structures play a crucial role in determining how certain tax rules are applied.
  • Valuation professionals must consider applying a market participant corporate tax rate for the respective country, as applicable, and must consider tax amortization benefit rules to be applied consistently throughout the analysis.
  • Different tax amortization benefit rules apply in different countries, and as such, should be addressed in valuations.

When valuing a foreign target company in the context of a purchase price allocation, the local tax rules within the company’s jurisdiction should be considered and applied pursuant to the acquisition structure. Acquisition transactions can be structured as a taxable asset acquisition or a stock acquisition.

In an asset acquisition, for U.S. tax purposes the buyer receives a stepped-up basis in the target company’s assets (assets minus liabilities). This means that the acquired net assets can be written up (or down) from their carrying value, and taxes can be minimized on any gain in a future sale of those assets1. Under this structure, intangible assets are amortized over the allowed amortization period based on the specific tax amortization rules applicable within the jurisdiction of the target company. Under U.S. tax law, both intangible assets and goodwill in a taxable asset purchase are amortized over fifteen years.

In some countries, tax amortization is not allowed for certain intangible asset types.

Tax Amortization Benefit Considerations

In a stock acquisition, the buyer does not receive a stepped-up tax basis for U.S. tax purposes in the acquired net assets. However, in certain circumstances, the buyer can make a Section 338 election2 whereby the transaction can be treated as a taxable asset purchase for tax purposes.

Once the acquisition structure and its tax implications have been established, the business valuation professional must consider the appropriate tax rules that apply to the target company and its jurisdiction.

The specific tax provisions applicable to the country in which the company is located and their impact on the concluded fair values of the intangible assets often receive less attention or are generally set aside until late in the process, when valuing a foreign company’s intangible assets in the context of purchase price allocations. In addition to applying a market participant corporate tax rate, business valuation professionals must consider and apply the appropriate tax amortization benefit3 rules for intangible assets in a given jurisdiction.

Often, when valuing a foreign company, valuation professionals can encounter challenges in calculating the tax amortization benefits applicable to the intangible assets recognized in a given acquisition.

Tax amortization benefit rules can differ significantly between countries, and they can also change over time. Therefore, the valuation professional must always consider the latest tax amortization benefit rules applicable as of the valuation date.

Further, amortization periods can differ between the different intangible assets in a given country, and in some countries, tax amortization is not allowed for certain intangible asset types. This is different from U.S. tax amortization benefit rules where all identifiable intangible assets and goodwill are amortized over a 15-year period for tax purposes, in a taxable asset acquisition or in a stock acquisition where the buyer makes a §338 election.

Tax amortization benefit rules applicable in a given jurisdiction must be applied consistently across the various intangible assets recognized in a given acquisition and must be applied in accordance with the acquisition structure.

For a more in-depth conversation of this topic, we welcome you to contact article author, Mercedes Falcon, or your VRC professional.

1 macabacus.com Asset and Stock Deals
2 “Sec. 338 elections generally take one of two forms: the Sec. 338(g) election, which is most useful in the case of foreign acquisitions, and the Sec. 338(h)(10) election, which is commonly used in the case of domestic acquisitions. Both types of Sec. 338 elections require that a purchaser acquire 80 percent of the vote and value of the target company’s stock.” VRC Tax Insight Perspectives: Valuation Plays Key Role in Section 338 Elections
3 Tax amortization benefit is defined as: “…the cash flow generated from an asset as a result of being able to write off the full fair value of the asset for tax purposes.” bizfluent.com, (2017, September 27). How to Calculate Tax Amortization Benefit