Transfer Pricing alert: 09-029Denmark issues guidelines on IP valuation |
Published
By Jonathan Bernsen and Asger M. Kelstrup
The Danish tax authorities have published new guidelines on business and intellectual property (IP) valuation for tax purposes. The new guidelines should be seen in the context of the Danish transfer pricing environment, which features detailed documentation requirements and a significant focus by the tax authorities on IP arrangements.
Background
The tax authorities have recently focused their audit activity on IP arrangements, particularly those involving one-time transfers of IP. Historically, the Danish guidance on IP arrangements, including valuation of IP, has been limited to the Danish documentation rules, which are based on the OECD Transfer Pricing Guidelines, as well as a set of fairly crude guidelines for determining goodwill values.
The goodwill guidelines were based on historic financial results, and did not take into account expectations around future returns. Accordingly, Danish taxpayers have been faced with a situation whereby they increasingly found themselves under audit for historic transactions involving IP, while having to rely on very limited guidance on those types of transactions. Further, the experience of many taxpayers has been that, during the audit process, the tax authorities required very detailed analysis and support for those transaction types. This resulted in uncertainty related to both audits and ongoing IP arrangements, for which Danish taxpayers had limited and ambiguous guidance.
Valuation guidelines
The new guidelines intend to cover both transfers of entire businesses and transfers of individual intangible assets. However, the focus of the guidelines is on the transfer of a business, and guidance is limited when it comes to valuation of individual intangible assets.
The guidelines include a summary of historic approaches to valuation for Danish tax purposes, including the goodwill guidelines mentioned above. Based on this summary, the guidelines conclude that an approach to valuation based on historic data should be discarded in favor of approaches based on expected future income. Accordingly, the guidelines describe various forward-looking approaches to valuation, including:
- Cost-based approaches;
- Discounted cash flow (DCF) models;
- Economic value added (EVA) approaches;
- Valuation methods using earnings multiples; and
- The relief from royalty method.
This part of the report does not offer any substantial recommendations, but rather serves as a summary of traditional valuation approaches. Further, this part of the report does not put these approaches in the context of the OECD Guidelines nor the Danish documentation rules. The descriptions are fairly typical, , but include comments on various topics that may be subject to some controversy within transfer pricing, including:
- Elements in determining a reliable interest rate for discounting purposes;
- Buyer versus seller perspective; and
- Reliable tax rates for purposes of determining after-tax cash flows.
Although the valuation guidelines mention these and other relevant issues, they do not include any guidance or recommendation. For instance, the issue of assetspecific risk and determination of asset-specific interest rates for DCF purposes is not covered.
In the final part of the report, the tax authorities provide some recommendations in the area of documenting valuations for Danish transfer pricing purposes. These recommendations are very broad and may be considered to significantly increase the documentation requirements for related-party transactions.
Summary
The new guidelines significantly change the generally accepted approaches to valuing individual intangible assets, as well as entire businesses, for Danish transfer pricing purposes. The guidelines focus on forward-looking valuation approaches, which are generally in line with the methodologies followed by most taxpayers. However, the documentation requirements included in the guidelines are broad and extensive and not well-defined. Accordingly, the guidelines should be considered in detail when contemplating IP or business reorganizations involving Danish groups or entities.