Cost of Capital: Applications and Examples, + Website, 5th Edition

CHAPTER 32

Cost of Capital in Transfer Pricing

Mark Bronson, David Ptashne, and Michelle Johnson

Introduction

Tax Transfer Pricing

Cost of Capital Estimates in Transfer Pricing

Example: Application of the Income Method

Cost of Capital Estimate

Pretax versus After-Tax Discount Rates and Income Streams

Derivation of Discount Rates for Licensing and Cost-Sharing Scenarios

Size and Country-specific Risk Factors

Relating Valuation of Acquired Intangible Assets for Transfer Pricing to Financial Reporting (ASC 805)

Standards of Value

Asset Definitions and Groupings

Remaining Economic Useful Lives

Valuation Methods

Treatment of Taxes

Practical Advice

The Role of Capital in Transfer Pricing for Financial Services Firms: Special Focus on Global Dealing Operations

Definition of Global Dealing

State of Regulatory Guidance

Issues to Be Addressed

Conclusion

Appendix 32A: Cost of Capital in Transfer Pricing Example

INTRODUCTION

In this chapter, we discuss the use of cost of capital in transfer pricing analysis, and elaborate on certain measurement issues that arise specifically within transfer pricing applications. Because the approaches applied in a transfer pricing context often differ from those used for financial reporting requirements (specifically those promulgated under ASC 805), we discuss the interrelationship between these two contexts. Last, we provide a subsection that addresses the treatment of returns to capital in transfer pricing analyses involving global dealing operations. ...