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Introduction
Tax legislation may require that share transfers within a multinational group be conducted at arm’s length, i.e. an inter-company share transfer should be made at the same price and terms as it would have been had the parties not been related to each other. This reference leaves room for interpretation and requires judgement and explanation when choosing valuation methods or making valuation assumptions. Making sure that the transfer price complies with local regulations can save costs and time. Independent valuation reports can help in providing backing and support where a share transfer is planned. Transfer Pricing Associates’ proven valuation process offers reliable valuation reports with a fast turnaround at reasonable rates.
Types of Transactions
A share valuation in an intra-group share transfer transaction may be useful or legally required amongst others when the share transfer is subject to capital gains tax or when the transaction is subject to transfer tax or capital duties.
Valuation Methods
Tax legislation in most jurisdictions generally requires that share transfers be conducted at arm’s length. This leaves room for interpretation and requires judgement and explanation when choosing valuation methods or making valuation assumptions. There are varying methods to value shares, including:
- Stock market price: one of the preferred methods since the value is determined by the market. However, the arket price should only be used if it is fairly representative of an active and broad market that is notinfluenced by unusual factors such as irregular trading or a thin market;
- Income method: this method determines value by estimating future cash flows and discounting them to give a resent value;
- Market method: value is determined through the use of publicly traded companies listed on a given stock exchange or based on open market transactions, whether public or private.
In most valuation studies several methods are selected for the valuation study. The use of various methods should yield a range of values. Significant differences between the methods should be reconciled to understand why they arise. A midpoint value is selected based on an average or a weighted probability calculation.
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