Tax Reform

VALUATION CHANGES UNDER THE TAX CUTS JOBS ACT (TCJA)

Phil Antoon, Managing Director

pantoon@alvarezandmarsal.com

April 13, 2018 / North America

As part of the Tax Cuts and Jobs Act, there are numerous changes that significantly affect the value of companies and intangible assets. Beyond changes to the corporate and pass-through tax rates, the TCJA contains many complexities that cannot be overlooked when valuing a business or intangible asset. One significant change is that the new law has codified a longstanding IRS position relative to the valuation of intangible assets: that goodwill, going concern, workforce-in-place, and other assets must be considered in the valuation of transferred intangible assets.

WHAT DO YOU NEED TO KNOW?

From a valuation standpoint:

DO…

  • Transfer intangible assets on the default valuation methodology as a multi-period excess earnings approach to ensure that goodwill, going concern, and workforce-in-place (and any other relevant assets, e.g. customer relationships) are also captured in the valuation of the transferred asset where appropriate.

DO NOT…

  • Utilize a relief-from-royalty approach to value the transferred intangible assets, as this approach does not capture value beyond the rights associated with licensing the intangible asset (thus excluding goodwill, going concern, workforce-in-place, etc.).
  • Unilaterally utilize the value of the asset derived for financial reporting purposes when transferring an intangible asset, as this value is often estimated utilizing the relief-from-royalty approach.

There are various tax valuation nuances to be mindful of as it relates to income tax purposes that differ from valuations conducted for financial reporting, gift and estate tax reporting, etc. Here are several key factors to ensure the valuation is appropriate for income tax purposes:

HOW WILL IT AFFECT YOU?

Companies of all sizes across all industries will be affected by the TCJA, including:

The new outbound IP migration rules will impact those who migrate their U.S. IP to a non-U.S. entity, but all companies must be cognizant of the effect the new law will have on their taxes and valuations.

Examples being a significant benefit to capital intensive companies through the ability to immediately deduct certain capital expenditures to the Global Intangible Low Tax Income (GILTI) tax potentially creating an unexpected tax burden to many companies – specifically those with significant intangible assets such as pharmaceutical and technology companies.

ARE YOU GILTI?

The GILTI tax has taken many multinational companies by surprise, and could result in income generated outside of the U.S. being subject to U.S. income taxes. Thus, companies must be cognizant of the GILTI tax as part of a valuation, and should ask the following:

  • Are you incorporating GILTI tax into your discounted cash flow analysis when valuing a business with global operations?
  • Have you extended the discounted cash flow period to account for long-term differences in the GILTI tax?
  • Have you revisited your expense allocation procedures and identified whether your CFCs have tax basis in any assets that give rise to GILTI?
  • Are certain capital-intensive activities (e.g. manufacturing, telecom) occurring outside of the U.S. and/or certain IP and service activities occurring in the U.S.?

WHAT CAN A&M TAXAND DO FOR YOU?

If your company is a large multinational business with a complex legal entity structure or a startup in the early stages, tax reform is expected to usher in significant changes.

There are three key components in which A&M Taxand can help your companies navigate through this change:

    • Gain insight into the fair market value of your company’s entities and/or assets to ensure that you are appropriately incorporating the effects of the TCJA.
    • Help plan your tax strategy with a full comprehension of various benefits and costs, both of which are driven by valuation.
    • Incorporate a valuation of entities and assets consistent with appropriate tax valuation approaches.

Under the current state of tax reform, we advise our clients to be proactive and take necessary precaution. It’s best for any company to optimize the most viable and/or beneficial tax planning opportunities moving forward.

To learn more about our services, visit: https://www.alvarezandmarsal.com/expertise/tax


North America