Intangible Assets Valuation and High Uncertainty

01 September 2011
By Dr. Emmanuel Llinares and Dr. Vladimir Starkov, et al.

This article is the eighth in a series of ten articles produced by International Tax Review on tax-effective intellectual property management. The article provides an example of mitigating the risks of intra-group sales of intangibles when the asset being transferred is not yet fully developed, and its value after the full development is highly uncertain. In this context, one of the principal issues with which taxpayers are confronted relates to the risks associated with the actual profits realized in future periods from exploitation of the transferred assets. Those risks, in turn, have a material impact on the valuation of restructuring payments and on other aspects of transfer pricing system design and implementation. The authors provide a simplified example demonstrating how option pricing can serve as a useful framework for adjustment clauses in related party transactions. Lacking such clauses, re-valuations of the transferred assets can be implemented by tax authorities several years after the transaction took place. Including such adjustment clauses is consistent with the conduct of arm's length parties, and their implementation in related party context may provide a way to mitigate both business and tax risks.