Transfer Pricing

Valuation Studies

NERA assists clients in establishing fair and accurate valuations of businesses and/or intellectual property associated with business reorganizations, tax planning, or mergers and acquisitions.

Business Valuation

Appropriate valuation analyses that are consistent with the arm’s length principle require rigorous and defensible application of entity-level or asset-level valuation techniques that recognize underlying economic and market conditions. To make sound forecasts, it is important to understand the dynamics of the marketplace. This is the hallmark of NERA’s approach—one that has been successfully employed for clients seeking an accurate measure of business or intellectual property value.

Intangibles Valuation

NERA assists MNCs in this area of compliance and tax planning by performing robust and defensible royalty rate evaluations that make appropriate use of both benchmarking and income-based valuation methods for establishing intercompany royalty rates.

i. Comparable Transactions
The comparable transactions method is a widely used approach that produces reliable results if certain comparability criteria are met. Among those criteria are comparability with respect to the intangible property transacted and the profit potentials of the licensor and licensee.

To achieve reliability when using this method, a sufficiently high level of comparability between the unrelated and related party transactions must be obtained. Information on unrelated party transactions comes from two broad types of comparable analyses:

• Licensing agreements between a related tested party and unrelated parties. Information on these agreements is typically provided by the client.
• Licensing agreements among entities unrelated to the tested party. These agreements are typically obtained from databases maintained by third-party providers.

NERA economists have access to an extensive array of licensing databases whose scope goes beyond the data compiled from filings with the US Securities and Exchange Commission, including franchising associations and national and regional intellectual property offices outside the US. We often supplement this data with financial information from the licensees and licensors to further support the comparability of the unrelated party transactions.

ii. Profit Split Methods
NERA economists have assisted clients by using a variety of profit split methods including:

• Comparable Profit Split Method. This method relies on the application of the profit split results observed in transactions among unrelated parties to the related party transactions.
• Residual Profit Split Method. This method relies on categorizing functions, risks, and assets between "routine" i.e., those whose returns are determined by economic benchmarking, and “non-routine” or “entrepreneurial,” i.e., those whose remuneration is computed as a residual profit. The residual profits are split between the parties based on an appropriate allocation principle.

iii. Other methods
Additional methods that can be used to determine arm’s length royalty rates include a cost approach that relates the value of intangible to the economic cost of its development, and utilizing the values of comparable intangible assets produced for accounting purposes or obtained from specialized studies. Trademarks are an example of intangible assets where such method can be applied. Once a range of asset or equity multiples related to trademark valuations is determined, it can be applied to the asset or equity value of the tested party to determine the range of the values of the trademark in question.

The alternative valuation methods can be used as supporting analyses and in situations that call for reconciling the market valuation of intangible assets with their internal valuation.