Valuation, transfer pricing and tax: Strategic imperatives

In today’s volatile geopolitical landscape, multinational enterprises (MNEs) are increasingly re-evaluating their supply chains and legal entity structures. Whether prompted by tariffs, trade wars, or shifting regulatory regimes, these decisions are no longer just operational — they are deeply financial and strategic. At the heart of this transformation lies a critical triad: valuation, transfer pricing and international tax.

Tariffs and geopolitical pressures don’t just equate to cost line items — they reshape the economics of global operations. As companies consider relocating manufacturing hubs, restructuring intercompany flows, or altering intellectual property (IP) ownership, they must simultaneously assess how these moves affect enterprise value, tax exposure and compliance obligations.

This is where valuation, transfer pricing and international tax intersect. Each discipline offers a lens through which one can evaluate the implications of structural change. But it is their integration that ensures decisions are both defensible, strategically sound and value-accretive.

Transfer pricing: The compliance backbone

Transfer pricing translates everyday company functions and business into policy. It ensures that intercompany transactions — whether for goods, services, or intangibles — are priced at arm’s length. While it sounds straightforward, our constantly evolving economic landscape, with sweeping legislative changes in the U.S. and geopolitical uncertainty across the globe, creates the need for companies to keep a closer eye on their transfer pricing policies. With the escalated use, continual changes and legal uncertainty of tariffs by the Trump administration, and their potential effects on supply chain modifications, transfer pricing complications and opportunities may arise.

As companies grapple with the impact of legislative change and other external recent global market conditions (e.g., COVID-19 and supply chain shortages) in a highly innovative and dynamic environment, multinational enterprises have been provided with ample opportunity to (re)consider their global IP portfolio. This can run the gamut in terms of each enterprise's facts, experiences and opportunities, but may include reshoring/nearshoring, cost sharing or IP centralization strategies, all of which may require some level of asset pricing, as value moves cross-border.

Moreover, M&A markets and the institutional sentiment to consolidate intangibles provide their own challenges, whether, as part of a planned exit strategy or a longer-term IP initiative to align assets and manage associated risk ex ante at various intervals in the evolution of the product development cycle. Similar to the organic development and potential subsequent cross-border transfer of intangibles scenario, movements of acquired intangibles present multiple challenges. The challenges are somewhat multifaceted and have been considerably addressed through additional excerpts in Section 482 and perhaps in even earlier Treasury Regulations (1.482-7) with the introduction of the Acquisition Price Method, which assumes aggregated value to be the starting point.

Regardless, there are still multiple subjective considerations that may distinguish purchase price and book value from economic value. These considerations may include determining the useful life of intangibles, treatment of synergies, goodwill and going concern as well as the impetus for the purchase or sale — the deal thesis for what was actually sold or purchased (e.g. proprietary technology; access to customer lists; market share and eliminating a competitor; adding an established workforce; other similar make-versus-buy decisions that culminated in the business combination) are all at the crossroads of transfer pricing, tax and valuation.

Intangibles, in particular, are often difficult to identify and 'hard to value' given their subjective nature and reliance on assumptions. Yet, the pricing of these assets can, especially in a transfer pricing context, lead to significant shifts in income among entities within a commonly controlled group.

Getting it wrong comes with a high price. The IRS significantly ramped up its enforcement of transfer pricing compliance with new funding from the Inflation Reduction Act. Budget cuts and personnel reductions this year may impact continued expansion of IRS transfer pricing coverage, but the focus on intangibles is likely to continue. It’s not a coincidence that the core issue in the vast majority of recent transfer pricing litigation is intangibles and their valuation.

Failure to achieve a supportable outcome in the U.S., for example, can trigger severe consequences under IRC Section 6662:

• A 20% penalty for substantial valuation misstatements (e.g., intercompany prices that are 200% or more or 50% or less than the IRS-determined arm’s length price, or exceed the greater of $5 million or 10% of gross receipts)
• A 40% penalty for gross valuation misstatements (e.g., intercompany prices that are 400% or more or 50% or less than the IRS-determined arm’s length price, or exceed the greater of $20 million or 20% of gross receipts)
• Costly defense proceedings if there is the involvement of more than one country in a transfer pricing dispute, triggered by possible double taxation, state income tax or customs valuation issues

The IRS has recently taken a more aggressive posture in asserting these penalties where documentation is deemed insufficient. This underscores the importance of contemporaneous, high-quality transfer pricing documentation and the strategic use of Advance Pricing Agreements (APAs) to mitigate risk.

Key considerations when valuing intangibles in a changing regulatory and legislative environment include:

• Adjusting transfer pricing models to reflect tariff-induced cost changes
• Revisiting tested-party selection and benchmarking
• Documenting rationale for year-end true-ups and customs declarations