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Taxand USA delves into the implications of having to value legal entities, intellectual property and tangible assets, as well as what you may need to consider relative to the prospect of tax reform.
To date there have been countless articles about the potential effect of tax reform on companies both large and small, with the focus of these articles on the potential outcomes of tax reform on companies’ effective tax rates. However, we have not encountered any discussions of what will be a key factor in planning for and reacting to tax reform: the fair market value of legal entities, intellectual property and tangible assets.
Given that the U.S. federal tax rate of 35 percent is among the highest tax rates in the world, companies frequently implement strategies to maximise operational efficiencies and correspondingly reduce their effective tax rate through restructuring of their global entities and assets. These structures often include relocating intellectual property (IP) into jurisdictions where the product/service would be sold/provided; e.g., the non-U.S. rights for IP related to sales in a European country would be moved into that country. Similar arrangements are made relative to legal entities and tangible assets; e.g., operations in countries that do not possess any IP and act solely in a sales or distribution role would be resident in a local legal entity that operates as a limited risk distributor. Additional methods for improving operational efficiencies and effective tax rates include supply chain realignment, out-from-under transactions, legal entity rationalisation, and transfer of fixed assets/manufacturing operations, among others.
Discover more: Tax reform and the effect on valuation
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Whether your company is a large multinational business with a complex legal entity structure or an emerging company that is in its early stages, tax reform is expected to usher in significant changes. A key component of this change is to have insight into the fair market value of your company’s entities and/or assets to ensure in advance that you are appropriately prepared for tax reform.