Global Services Case
Background
Valuation for transfer pricing and taxation purposes has shifted from a routine compliance exercise into potential future high-stakes litigation. Global tax authorities have increasingly identified technical pitfalls in how multinational enterprises (MNEs) value intercompany transactions. In practice, a variety of commonly observed valuation assumptions are now primary targets for tax authorities’ challenges.
Scrutiny is often most intense when a corporate group undergoes structural changes such as the transfer of Intangible Property (IP) or the relocation of business units. The challenge from tax authorities typically follows a hierarchical approach, beginning with a critique of the valuation methodology itself. Authorities will question whether a Cost, Market, or Income approach (or a hybrid of these) is most appropriate based on the specific facts and circumstances of the case.
Once the methodology is established, the focus shifts to specific components of the financial modeling. This involves a detailed review of the projections and forecast parameters, discount rates, and warranted adjustments, among others.
A Recent Challenge involving Methodology, Projections, and Discount Rate – Some Important Aspects
The case of Global Services v. Ministry of Taxation (2025) is a key decision in Danish transfer pricing law, specifically addressing the hierarchy of valuation methods when a recent market transaction (an acquisition) exists.
The dispute involved the transfer of intangible assets (IP) from a Danish subsidiary to a newly established foreign group entity. The core of the conflict was whether to value these assets based on a forward-looking economic model (DCF) prepared by the taxpayer or an acquisition-based price (APM) derived from a recent third-party purchase of the group (i.e., an internal comparable). The case highlights a differential that may arise when internal models yield a significantly lower value than recent market reality (as measured by a precedent transaction).
The taxpayer used a Discounted Cash Flow (DCF) model to determine the value of intellectual property (IP) transferred during a business restructuring, after carving out routine profits, to arrive at a residual cash flow attributable solely to the IP. Their position was built on the claim that the IP had suffered a significant decline in value between its initial acquisition and the date of the internal transfer due to adverse market developments. Consequently, the taxpayer maintained that their reported valuation accurately reflected the “profit potential” at the time of the transaction and that the financial projections used in their documentation were reliable reflections of the expected economic reality (at the time of the transfer).
The tax authority challenged this valuation, contending that the taxpayer had significantly undervalued the transferred assets (therefore shifting taxable income abroad). The authority’s position focused on the technical inputs of the taxpayer’s DCF model, specifically arguing that the discount rates and the treatment of routine functions were inconsistent with market standards.
The tax authority asserted that the taxpayer had applied an inappropriately high discount rate to the non-routine intangibles while overvaluing routine support functions at a lower rate, thereby effectively suppressing the residual value of the IP. In other words, the proposed DCF-based results did not reconcile with the significantly higher value paid by a third party (in the recent acquisition transaction).
The tax authority used hindsight, basically reviewing the projections employed in the DCF applied by the taxpayer against actual data (ex post), essentially supporting that the taxpayer’s DCF projections were understated, effectively using the OECD’s Hard-to-Value Intangibles (HTVI) approach. Furthermore, the discount rate was also challenged, as the comparables used for WACC calculations were not fully comparable and did not incorporate additional risk adjustments (premia) due to a lack of empirical evidence. Based on these findings, the Tax Agency issued a substantial upward adjustment to the company’s taxable income.
The court ultimately ruled in favor of the tax authority, upholding the increase in income. The court found that the taxpayer’s valuation lacked sufficient empirical support and that the projections used in the taxpayer’s DCF application were unreliable. The court emphasized that in business restructurings, the burden of proof lies on the taxpayer to demonstrate that their valuation assumptions, particularly the discount rates, align with the nature of the transaction.
For further insight into how these developments may impact your transactions, please reach out to:
Paul Valdivieso
Valuation Principal