It should be recognised in determining and evaluating discount rates that in some instances, particularly those associated with the valuation of intangibles still in development, intangibles may be among the most risky components of a taxpayer’s business. It should also be recognised that some businesses are inherently more risky than others and some cash flow streams are inherently more volatile than others. For example, the likelihood that a projected level of research and development expense will be incurred may be higher than the likelihood that a projected level of revenues will ultimately be generated. The discount rate or rates should reflect the level of risk in the overall business and the expected volatility of the various projected cash flows under the circumstances of each individual case.
TPG2022 Chapter VI paragraph 6.172
Category: D. Determining arm’s length conditions in cases involving intangibles | Tag: Discount rate, Discounted Cash Flow (DCF), Hard-to-value intangibles (HTVI), Intangibles, Valuation, Valuation method, Valuation technique, Volatile, WACC
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Next » Related Guidelines
- TPG2022 Chapter VI paragraph 6.171There is no single measure for a discount rate that is appropriate for transfer pricing purposes in all instances. Neither taxpayers nor tax administrations should assume that a discount rate that is based on a Weighted Average Cost of Capital (WACC) approach or...
- TPG2022 Chapter VI paragraph 6.170The discount rate or rates used in converting a stream of projected cash flows into a present value is a critical element of a valuation model. The discount rate takes into account the time value of money and the risk or uncertainty of...
- TPG2022 Chapter VI paragraph 6.158When applying valuation techniques, including valuation techniques based on projected cash flows, it is important to recognise that the estimates of value based on such techniques can be volatile. Small changes in one or another of the assumptions underlying the valuation model or...
- TPG2022 Chapter VI paragraph 6.178Where the purpose of the valuation technique is to isolate the projected cash flows associated with an intangible, it may be necessary to evaluate and quantify the effect of projected future income taxes on the projected cash flows. Tax effects to be considered...
- TPG2022 Chapter VI paragraph 6.177In this regard, where specific intangibles contribute to continuing cash flows beyond the period for which reasonable financial projections exist, it will sometimes be the case that a terminal value for the intangible related cash flows is calculated. Where terminal values are used...
- TPG2022 Chapter VI paragraph 6.162The following sections identify some of the specific concerns that should be taken into account in evaluating certain important assumptions underlying calculations in a valuation model based on discounted cash flows. These concerns are important in evaluating the reliability of the particular application...
- Report on the Application of Economic Valuation Techniques (2017)The Study on the Application of Economic Valuation Techniques for Determining Transfer Prices of Cross Border Transactions between Members of Multinational Enterprise Groups in the EU provides an overview on how valuation techniques can practically and most efficiently be used for transfer pricing...
Related Case Law
- Portugal vs “B Restructuring LDA”, February 2021, CAAD, Case No 255/2020-TB Restructuring LDA was a distributor within the E group. During FY 2014-2016 a number of manufacturing entities within the group terminated distribution agreements with B Restructuring LDA and subsequently entered into new Distribution Agreements, under similar terms, with another company of the...
- Bulgaria vs KEY END ES ENERGY, April 2020, Supreme Administrative Court, Case No 4972Key End Es Energy concluded a share purchase and sale agreement of 20.12.2012 with a related party LUKERG BULGARIA GmbH, under which KEY END EU ENERGY transferred to its parent company LUKERG BULGARIA GmbH the ownership of the shares in eight subsidiaries. The...
- Denmark vs “IP ApS”, March 2023, Tax Tribunal, Case No. SKM2023.135.LSRThe case concerned the valuation of intangible assets transferred from a Danish company to an affiliated foreign company. The Tax Tribunal basically agreed with the valuation of the expert appraisers according to the DCF model, but corrected the assumptions with regard to revenue...
- Portugal vs C… – Sociedade de Investimentos Imobiliários, S.A., November 2023, Tribunal Central Administrativo Sul, Case 541/02.5 BTLRSThe tax authorities had issued an assessment in which the value of shares transfered between related parties had been adjusted by application of the arm’s length principle. The assessment was appealed to the Administrative Court, which upheld the assessment. An appeal was then...
- Finland vs. Corp. February 2014, Supreme Administrative Court, KHO:2014:33A Ltd, which belonged to the Norwegian X Group, owned the entire share capital of B Ltd and had on 18.5.2004 sold it to a Norwegian company in the same group. The Norwegian company had the same day transferred the shares back on...