Every multinational enterprise has or considers joint ventures (JV), especially in risky activities or locales. Each JV poses a variety of interrelated valuation, accounting and tax considerations. Is your checklist current?
Valuation and Related Services for Joint Ventures
Multinational enterprises routinely enter into strategic alliances and joint ventures (JVs) for a variety of reasons: to enter new and unknown markets, to spread risk with respect to massive projects, to attain greater access to financial resources or greater efficiencies with the combination of technologies, to develop economies of scale, to maneuver around regulatory barriers and countless others. Your company may have entered into a JV in the past, or may be contemplating such arrangements going forward.
Of course, JVs are nothing new. They are as old as international business.
The opportunities and challenges of modern international business are complex and multifaceted. JV arrangements require not only operational and strategic considerations related to the confluence of assets and services of two or more entities, but also the financial, accounting and tax requirements of two or more countries. More than 60 countries now have transfer pricing regulations, with differing standards of common control.
Ready … Set … Go!
These financial, accounting, tax and transfer pricing issues can be daunting, especially when they are not evaluated or taken into account when drafting the pertinent venture documents, planning each party’s own arrangements or designing the compliance obligations of the JV and each of its participants.
The best time to evaluate these matters is during negotiation of the JV, or soon after if it is discovered that the issues were not fully anticipated and addressed at an earlier stage.
Have you considered all of these issues for your JVs?
We can assist with the various financial accounting (FA), International Financial Reporting Standards (IFRS), tax (T) and transfer pricing (TP) issues highlighted in the following hypothetical JV illustration:
Click here to view illustration.
Issue 1. JV Level (one or all parties)
- Relative share of each participant’s ownership in the JV (FA, IFRS)
- Valuation of contributed tangible and intangible assets (including intellectual property, such as trademarks, trade names, licenses, workforce, know-how, etc.); may also involve enterprise valuation where businesses or legal entities are to be transferred, or made available, to the JV (FA, IFRS, T, TP)
- Valuation of services to be provided to the JV (FA, T, TP)
- Evaluation of currency, capital or guarantee matters (FA, IFRS, T, TP)
- Advising and supporting your position where one or more participants invite their own appraiser(s) to the table for valuation or pricing negotiations
- Using local appraisals in all material countries as allowed by local law, so the local regulatory and tax authorities accept the pertinent valuation reports in local format when necessary
- Advising and reconciling local generally accepted accounting procedures (GAAP) and IFRS differences and implications of valuation determinations, where applicable
- Assisting with determining whether participants and the JV are under common control for TP purposes in the pertinent countries
- Coordinating and advising on valuation and TP matters, including conducting TP studies for tax compliance or submission for an Advance Pricing Arrangement (APA)
Issue 2. JV or JVOpCo Levels
Each of the issues noted above will have implications at the JV level, whether or not JV companies are formed.
Issue 3. Project Level (local country)
Each of the issues noted above will have implications at the local country level. Additional issues must also be considered.
- Appraisal licensing requirements, as directed by local laws
- Financial reporting standards
Tax compliance matters:
- Local or regional taxation
- National taxation
- Customs valuation
International taxation matters, such as:
- Withholding obligations on some or all payments made to the participants or third parties
- Local taxable presence of the participants
- Presence of a “permanent establishment”
- Treaty availability
- Others, depending on the situation
- TP documentation requirements
- Desirability of an APA to minimize TP exposures and provide certainty
- Evaluation of “uncertain tax positions,” where applicable, such as in U.S. GAAP situations, either at the JV or participant levels
Issue 4. TP Functions of JVs
An additional element of JVs that is found to be helpful is to formulate financial sharing ratios as potential comparable transactions for transfer pricing purposes. The compensation for specific functions performed by unrelated JV members can be an effective comparable for pricing controlled transactions of the parties. For example, we have found that the overall profit/loss split formulas in joint ventures can be useful in resolving major transfer pricing disputes between treaty or non-treaty countries.
In short, a wide range of valuation, financial accounting, tax and transfer pricing issues are inherent in any international JV.
This newsletter was developed with contributions from members of American Appraisal’s financial valuation practice: Gerald Mehm, senior managing director, and Carlo Carpino, director.