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Tax valuation is a critical component of any effective tax planning strategy. As regulatory focus on tax strategies continues to increase, it is important for companies to understand the true cash impact of tax valuation early in the assessment of any acquisition or significant tax event.
The success of nearly every corporate transaction, restructuring or financial strategy often depends on accurately accounting for the tax consequences. Tax valuation helps companies understand the impact of the event and how taxing authorities will assess a transaction—before the plans are put into action. The right approach can also help avoid creating an uncertain tax position, which can be a risk if a valuation is too aggressive.
The globalization, outsourcing and movement of value towards intellectual property has increased tax-related disputes. The core issue of these disputes and negotiations with tax authorities revolves around valuation. The specific demands of the tax authorities require specialist advice and detailed knowledge of their working methods and practices.
An overseas transaction which involves domestic assets, profit distribution on outsourced projects, change in corporate structure, a disposal of assets, or a new shareholding arrangement are some of the issues that can invite the attention of tax authorities.
When valuing transactions, finance, accounting, and tax professionals often wonder if it is appropriate to use financial reporting valuation estimates for tax purposes. Unfortunately, the purchase price allocation rules for each are fundamentally different. For example, once the purchase price has been determined, book and tax principles provide different methods for allocating the respective purchase prices to the acquired company’s assets. These differences result in the need for separate valuation procedures to ensure proper analysis for tax and financial reporting.