Assessing how synergies in asset valuation affect TP compliance

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Assessing how synergies in asset valuation affect TP compliance

Sponsored by

Sponsored_Firms_QCG.png
The Shapley value can help companies to comply with the arm's-length principle

The Shapley value can be used to ensure compliance with the arm’s-length principle in cases of asset synergies, as José Augusto Chamorro Gómez of QCG Transfer Pricing Practice explains.

It has been very common to consider that market prices, and even the application of widely accepted ‘fair’ asset valuation methods, are sufficient to comply with the arm's-length principle. However, this is not necessarily the case, as there are economic phenomena such as synergies that have peculiar implications.

Synergies imply that the interaction of assets, which can occur due to the coincidence of their presence in the same organisation, leads to a joint generation of value greater than the sum of the value generated by each asset individually without interacting with each other.

In terms of an asset transaction, this could mean that the value contribution to the entity buying the asset would not be the same as the amount lost by the entity selling the asset.

Regarding the valuation of the asset in question, a widely accepted path is that of the present value of discounted future cash flows. Here, the main problem is the identification of the company's profits that would be attributable to the asset under analysis.

To simplify this point, the Shapley value tool can help us determine the profits that would be ‘fairly’ attributable to a specific asset located in a company.

The Shapley value

The Shapley value is a wealth distribution method in cooperative game theory under the assumption that everyone collaborates in a large coalition. It is a ‘fair’ distribution in the sense that it is the only distribution with certain desirable properties (efficiency, skewness, linearity, and null player).

Given a group N (of n players) and a function υ∶ 2N → R with υ(∅)=0, where ∅ denotes the empty set. The function v that assigns subsets of real players is called a characteristic function.

The function v has the following meaning: if S is a coalition of players, then v(S), called the value of the coalition S, describes the total sum of the payments to the members of S that can be obtained for such cooperation.

According to the Shapley value, the amount that player i obtains during a coalition game (v,N) is:

eq1.jpg

Where n is the total number of players and the sum is spread over all subsets of N that do not contain player i.

An example:

Suppose we have 3 players ({a,b,Δ}), where a is the set of assets housed in A (except Δ) and b is the set of assets housed in B, while Δ is a hard-to-value asset.

Initially, asset Δ is owned by A and its sale to B is analysed. Therefore, the estimate of the ‘fair’ profit corresponding to asset Δ is:

eq2.png

Here, the following is true: f(ϕ)=w,f:R→R where ϕ is the annual utility of an asset and w is the present value of the asset.

The asset price Δ would then be: fΔ ) = wΔ

Arm's-length implications

In the case above, A should not be willing to sell asset Δ at a price less than f(v(a,Δ)-v(a)), because it would otherwise not compensate for the loss of profits for A from ceasing to exploit asset Δ.

So, assuming the condition v(Δ < v(a,Δ) - v(a) was fulfilled, there would be no impediment for this to occur. Here, wΔ would not be arm's-length despite being a ‘fair’ price, because it is not a price for which the asset owner would be willing to sell.

Furthermore, in the event that the condition v(a,Δ) - v(a) > v(b,Δ) - v(b) was fulfilled, the contract curve between A y B would be ∅. In other words, there would be no possible price at which the transaction would take place, since at any price, either A, B, or both would worsen their initial situation, which would not comply with the arm's-length principle.

What has been described above leads us to reflect that, although the priority of the transfer pricing framework is arm's-length compliance, it may be common that the lack of information in the analysis entails the risk of having no way of demonstrating the existence or finding arm's-length prices.

However, in the same way, market prices as well as theoretical ‘fair’ prices can be an acceptable alternative, especially for the practice of TP analysis.

José Augusto Chamorro Gómez

Senior economist, QCG Transfer Pricing Practice

E: jose.chamorro@qcglatam.com 

 

more across site & shared bottom lb ros

More from across our site

Heads of tax need to push their teams forward as strategic business advisers to add value across the organisation, says Sandy Markwick
Scott Bessent reportedly felt undermined by Musk naming Gary Shapley as acting IRS commissioner; in other news, Baker Tilly will combine with a top 15 US firm
The promise of nine years’ tax certainty and a ‘rational and pragmatic’ government process makes APAs a no-brainer, Indian tax advisers tell ITR
Despite garnering significant revenues from multinationals, Italy’s digital services tax presents pressing double taxation issues, say Stefano Simontacchi and Francesco Saverio Scandone of BonelliErede
ITR’s research shows that in-house tax counsel in Asia also feel underserved by their advisers’ international networks
World Tax global head of research Jon Moore tells ITR how his team spots standout submissions, and gives early statistical insights into this year’s entries
Australia’s conservative opposition will repeal controversial tax agent reporting rules if elected in the country’s May general election
Shapley would be the fourth person to hold the job this year; in other news, UK tax advisory firm MHA raised fewer funds than expected from its London IPO
The US needs to be involved in pillar one for there to be more international acceptance of the project, Michael Masciangelo says
The UK regulator is investigating EY’s auditing of the national postal service as it relates to the high-profile Horizon scandal, which saw hundreds wrongfully convicted
Gift this article