After coming out of a recession, companies should assess whether or not a tax restructuring of their operations to line up geographical growth and relative tax rates will make sense. Restructurings can result in the movement or consolidation of ownership of legal entities which can potentially trigger taxable events. This process may require the estimation of the fair market value of hundreds of legal entities, depending on the extent of the restructuring. This article is going to go over some things you should be aware of if you are in the process of, or considering, restructuring.
Transfer pricing policies – In every case, projected profits should always give specific consideration to transfer policies among all of the entities, like an allocation of certain levels of profit manufacturing a product, or a royalty for the right to sell a software product, or even an intercompany service agreement for the provision of administrative services. Transferring pricing policies among entities should follow the suitable transfer pricing regulations and statutes.
The premise of value – When valuing all of the entities of a company, the decision has to be made whether to assess the entities on a stand-alone or an aggregate basis. The proper premise of value is important because it will impact certain valuation assumptions. This will include the development of the discount rate, assumed tax rates, and applicability of discounts for lack of control and marketability.
Valuation approaches – The three basic approaches you can take are typically considered when estimating the fair market value of operating and non-operating legal entities: the income, market and net assets approaches.
Income approach – This approach is a valuation technique that will provide an estimation of the fair market value of a legal entity that is based on the cash flow that a business can be expected to generate over its remaining useful life. These cash flow projections are converted to their present value using a rate of return (or discount rate) suitable for the risk of achieving projected cash flows.
Valuations are something that should be handled by the people who are experienced and capable. Give DRDA a call; they are the best at what they do and will go over your companies documents with the utmost professionalism and care.