Reconciliation of Purchase Price Allocation and Transfer Pricing
May 4, 2010 in Transfer Pricing Report
Mergers and acquisitions are one of the key ways in which companies acquire new technology and other intangibles. Once this is done, companies typically integrate the newly acquired capabilities into the existing business, which often involves the transfer of intangibles across legal entities. Under such circumstances, companies often prepare one study that determines the Fair Value (FV) under SFAS 157 of the intangibles that they have purchased for financial statement reporting purposes, and a separate study to determine the transfer price that should be charged when the intangible is transferred from one legal entity to another.
The definition of intangibles in a purchase price allocation (PPA) is generally consistent with the definition used for transfer pricing—the two definitions are shown side-by-side in Table 1 and, in each case, the value is supposed to reflect the price paid between a willing buyer and willing seller. Taxpayers, therefore, often would like to use the FV computed in the PPA to determine the transfer price for the acquired intangibles when they are transferred across different legal entities, both to save on costs and to minimize the chance of using inconsistent data and assumptions. There are also practical accounting consequences of using different values and attempting to reconcile these differences under FAS 109.
The Internal Revenue Service, however, is generally skeptical about the use of PPAs for transfer pricing purposes, and the has stated that “allocations or other valuations done for accounting purposes may provide a useful starting point, but will not be conclusive for purposes of the best-method analysis in evaluating the arm’s length charge in a platform contribution transaction (PCT), particularly where the accounting treatment of an asset is inconsistent with its economic value.” The IRS does not provide any discussion of the relationship between financial reporting and tax standards and, therefore, neither identifies, on the one hand, what parts of a PPA may provide “a useful starting point” or, on the other hand, what changes have to be made to a PPA before it can be used as the basis for a transfer pricing analysis. Enjoying this article? To continue reading you need to take out a FREE trial to the Transfer Pricing Library.
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