When a company sells shares, contributes a business, or transfers intangible assets to another entity within the same group, the price of that transaction is subject to Transfer Pricing rules. In many of these cases, there are no comparable transactions between independent parties, and the technical basis for the transaction becomes a well-documented business valuation. The Transfer Pricing reform in Brazil, which adopted the standard of the Organization for Economic Cooperation and Development (OECD), makes this point particularly relevant for groups with operations in the region.
Valuation does not replace the arm’s-length analysis. It is the tool that allows one to support that analysis when the price depends on future cash flows rather than an observable market.
Which related-party transactions require a valuation?
A valuation report is required when the subject of the transaction does not have a direct market price. The most common cases in multinational groups are as follows:
- The sale or purchase of shares or participations in an unlisted company between group entities.
- The transfer of a going concern—including its assets, contracts, personnel, and customer base—as part of a restructuring.
- The assignment or licensing of intangible assets such as trademarks, patents, technology, or customer portfolios.
- Capital contributions in kind, mergers, or spin-offs within the group in which the value of the contribution determines the resulting ownership interest.
In all these transactions, the question is the same: What price would two independent parties have agreed upon, considering the options available to each? Answering this question requires estimating the value of the asset or business using a verifiable methodology.
What do the OECD Guidelines say about valuation techniques?
The applicable OECD Transfer Pricing Guidelines (2022 version) expressly permit the use of valuation techniques. According to paragraph 6.153, when it is not possible to identify reliable comparable arm’s-length transactions, these techniques may be used to estimate the arm’s-length price, and those based on discounted cash flow (DCF) can be particularly useful when applied correctly.
The Guidelines also caution regarding the sensitivity of the results. Paragraphs 6.170 and 6.171 note that small variations in the discount rate can lead to significant differences in the calculated value and that there is no single valid measure for that rate. Therefore, the report must explain and justify each assumption, not merely present a final figure.
For the transfer of a going concern, paragraphs 9.68 and 9.69 of Chapter IX indicate that the valuation must reflect all valuable elements for which an independent party would pay, and that techniques used in arm’s-length acquisitions may be useful for that purpose. A valuation prepared for accounting purposes, such as purchase price allocation, can serve as a reference, but it does not determine the arm’s-length price.
What does Law No. 14,596/2023 require in Brazil?
Law No. 14,596/2023 incorporated specific rules into Brazilian law for transactions in which valuation is critical:
- Intangibles (Articles 19–21): It defines an intangible asset and establishes that mere legal ownership does not automatically entitle the owner to any compensation. Results are allocated based on each party’s actual contributions.
- Intangibles that are difficult to value (Art. 22): It requires consideration of projections of future income or cash flows. For the taxpayer, Art. 22 requires detailed information on the projections used at the time the transaction was carried out.
- Business restructurings (Art. 26): It classifies as such any changes in commercial or financial relationships between related parties that transfer profit potential from one entity to another.
The practical implication is clear: a valuation prepared after the transaction, or without documented projections as of that date, leaves the taxpayer with a weak case before the Brazilian Federal Revenue Service (Receita Federal do Brasil, RFB).
Which assumptions in the valuation report are the most sensitive?
Financial projections are the starting point. They carry more weight when they come from routine business planning than when they are prepared solely for tax purposes, because they reflect the expectations on which management actually bases its decisions.
The discount rate is the assumption that has the greatest impact on the result. Its calculation must account for the cost of capital, the country risk premium, and the specific risks assumed by the entity receiving the cash flows, in a manner consistent with the functional analysis of the transaction.
The growth rate, the useful life of the assets, and the terminal value complete the model. When the terminal value accounts for the majority of the result, the report must justify why the business or intangible asset will continue to generate profits beyond the projected period.
A defensible transfer pricing valuation report shows how the value changes in response to reasonable variations in each assumption and links those assumptions to the functions, assets, and risks of each party.
At TPC Group, in every analysis of related-party transactions involving shares, businesses, or intangible assets, we evaluate the valuation that supports the agreed-upon price and its consistency with the functional analysis. Our goal is to establish an arm’s-length price that is technically defensible before the tax authorities.