As someone often (and fairly) accused of gratuitous use of the phrase “it depends” and the term “facts and circumstances”, many will be surprised when I answer my title question with a flat “No.”
A simplified version of a common fact pattern helps explain.
BritCo (a UK company) acquired IPCo (UK) in 2020. In preparing financial statements, BritCo allocated $50 of the overall purchase price to intangible property in its financial statement purchase price allocation.
In 2025, BritCo decides to transfer economic ownership of the legacy IPCo intangibles to it YankCo, the US parent company.
For tax purposes, the intangibles must be transferred at a value that complies with US and UK transfer pricing rules. Why can’t the Company simply use the financial statement valuation of the IPCo intangibles for transfer pricing purposes, perhaps simply updating the methodology with the latest inputs, assumptions, and forecasts?
As it turns out, a lot of reasons. Let’s touch on two of the most fundamental:
The purpose and scope of financial statement valuations and transfer pricing valuations are not the same.
- Financial statement rules require an allocation the purchase price of the acquired company among its assets and liabilities to ensure accurate financial reporting, in accordance with accounting and reporting standards.
- Transfer Pricing is based on different rules with different objectives that can be specific to each country involved. It involves determination of the arm’s length value of the transferred intangibles, ensuring that the income related to any transfer of intangibles is commensurate with the income attributable to the intangible being valued In addition to market value/willing buyer-willing seller considerations, economic substance, profit potential and reasonably available alternatives to transferring IP often inform the arm's length value.
The intangibles identified for financial statement purposes may not be the same as for transfer pricing.
- In preparing financial statements, intangible assets are those that lack physical substance and are not financial instruments. Financial accounting rules require subdividing identifiable assets from overall “goodwill” are amortized and are recognized separately from goodwill if they either arise from contractual or other legal rights, or if they can be separated from the acquired entity and sold or licensed.
- For transfer pricing, intangibles are non-physical assets for which compensation would be expected if they were transferred between independent parties. This includes goodwill, going concern value, and workforce in place.
In our example, the intangibles valuation was done five years ago for financial reporting purposes. The current IP transfer, by contrast, must consider not only the additional development and enhancements made to the intangibles over those five years, but the profit potential and use rights of future exploitation.
Under audit, the US or UK tax authorities would likely view the intangibles as bundled – inextricably linked and contributing to the core value chain and profit potential of the Company. Even if the valuation were updated to reflect the current market value of the specifically-identified intangibles, important differences exist. For example. Financial statement goodwill is valued separately from the identifiable intangibles; for tax and transfer pricing purposes, goodwill is lumped in with the other intangibles.
The takeaway: financial statement valuations can be a useful reference point for methods, inputs, and assumptions for intangibles transfer pricing, but never a substitute for a proper arms-length study.
