Why Transfer Pricing Matters in Acquisitions

Working on transfer pricing in an acquisition is to me is like a January day on a tropical beach would be to a better-adjusted member of society. This established, I’d like to share some common merger and acquisition transfer pricing pitfalls which can be as welcome as a winter sunburn.

FACT PATTERN: AcquiCorp US acquires F-Mål AB, a Swedish SaaS company. Economic ownership of the F-Mål intellectual property is left with the consequent Swedish subsidiary of AcquiCorp, and the two newly/affiliated companies cross-leverage said IP for their respective operations.

WHAT GENERALLY NEEDS TO HAPPEN TP-WISE:

• Establishment of arm’s length pricing of the intangibles licensed in either direction (e.g., via royalties or joint-development/cost sharing arrangement, etc.), as well as any other intercompany relationships (management fees, shared services, etc.)
• Upon any future migration of F-Mål IP, there needs to be arms-length remuneration for said at the date of transfer

 WHERE TP THINGS OFTEN GO SIDEWAYS:

• Failure to map and document IP ownership/intercompany value chain upon acquisition.
• Failure to reflect joint IP ownership/development in post-acquisition TP policies.
• Failure to consider potentially-taxable IP transfer implications when IP is migrated and/or F-Mål is converted to a contract/“captive” entity.
• Failure to value transferred IP under TP (vs accounting) principles, or valuing at acquisition date, ignoring subsequent development up to the date of transfer.
• Failure to consider implementation capacity/ability to implement complex or ambiguous future state models.

The risks of getting this wrong include issues in external audit, challenges by tax authorities, and delays, price reductions, or deal failure in future M&A due diligence. In other words, sand in the mojito.

Chad Martin directs Eide Bailly's Transfer Pricing Services practice.