The Danish tax authorities (SKAT) issued new guidelines on the valuation and documentation of businesses and intangible assets (SKAT: Transfer Pricing, kontrollerede transaktioner; værdiansættelse August 2009) on August 21 2009. This was an extraordinary event for two reasons. Firstly, similar guidelines are not available in many other countries. And secondly, with the IP guidelines SKAT is recognising that the transfer of businesses and intangible assets (IP transactions) is complex and often at the very heart of controversies with the tax authorities all over the world.

Previously, Danish guidelines related to valuation of IP transactions were limited to the arm’s-length principle, certain simplified principles on goodwill valuation and the OECD transfer pricing guidelines. There is no doubt that some of the ambiguity surrounding the valuation of complex intellectual property (IP) has evaporated with the publication of these guidelines, though, taking a more pessimistic approach, they have a number of shortcomings.

Danish history of IP valuation
Over the last couple of years, SKAT has focused its audit activity on IP arrangements, in particular those involving single transfers of IP. This focus has specifically been mentioned in SKAT’s action plans over the last three years, and SKAT’s audit activity has shown that SKAT intends to follow the plan. Denmark has recently experienced the largest transfer pricing adjustment in its transfer pricing history concerning IP transfers. In addition, the number of transfer pricing audits has generally increased in this period.

Historically, the Danish guidance on the valuation of IP has been limited to the Danish transfer pricing documentation rules and a set of fairly crude guidelines for determining goodwill values (TSS circular 2000-10, Vejledende anvisning om værdiansættelse af goodwill). The goodwill guidelines relate to the valuation of goodwill and, in principle, do not apply to other types of IP. Because valuations, according to the goodwill guidelines, are based on historical financial results and do not take future expected returns into account, it has been discussed whether valuations based on these guidelines are consistent with the arm’s-length principle. Furthermore, valuations, according to the goodwill guidelines, have restricted SKAT in connection with APA discussions and competent authority negotiations with other countries’ tax authorities, as the valuation principles were often considered overly simplified.

Until recently there has been limited guidance on which valuation methods SKAT would accept and how to apply and document them. This limbo has created uncertainty both for the taxpayers and for SKAT, and the intention of the new IP guidelines is to create consensus that will provide the taxpayers and the advisers with an expectation of accepted valuation and documentation methods for IP transactions. Another important purpose is the admirable attempt to create homogeneity in the tax assessment across the national assessment centres.

Having said that, the objectives of the new IP guidelines are to: