From 409A to audits, independent valuations are a popular topic of discussion these days…and for good reason. They can make all the difference in defending your position – and that of portfolio companies – with the IRS and financial statement auditors.

Q. Why do I need an independent valuation for stock options, as opposed to a valuation performed internally?

A. A decade ago we may have said, “You don’t.” But these days, the big picture tells us that you should only use an internal valuation if your in-house capabilities have the right expertise. Valuations come into play on too many levels to take a chance, especially when dealing with 409A (taxation of deferred compensation), GAAP and audit concerns.

Just as important, an internal appraiser needs to understand how the valuation will be defended if regulators take a closer look and require you to “show your work.” Also, your auditors will be assessing the valuation as part of their audit of compensation.

Q. You mentioned 409A in relation to granting stock options as compensation, which is common practice for us. What will an independent valuation accomplish?

A. On the tax side, under 409A, regulators may at some point be checking into whether the stock option was granted at Fair Value. An independent valuator gives you a safe harbor for these stock options when the IRS comes calling.

There are certain safe harbor provisions for internally prepared valuations, as well. However, your in-house appraiser needs to have qualifications similar to an external valuation expert in order to meet the standards.

If you don’t meet safe harbor and are deemed to have granted stock options at less than Fair Value, you’re looking at significant penalties: the recipient of the options will be hit with a 20 percent penalty on top of regular taxes and interest.

Q. Is 409A the main driver for independent valuations, then?

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Even without the recent headlines regarding Amazon’s lawsuit against New York, eCommerce Sales Tax has become a pressing issue for companies that sell online. The guidelines differ from state to state, can be extremely complex, and can lead to significant problems for companies that are not up to speed. Rosanna DiFilippo answers some topline questions about the issue.

In addition, we invite you to listen in on an audio interview with Rosanna on MFA’s Thought Leadership page.

Q. Is sales tax for online transactions any different than for in-store purchases?

A. It is often not the type of purchase made but the location of the sale and delivery of items that make eCommerce sales tax complex. Taxation is generally dependant on whether the seller has “nexus” in a state - that is, whether its presence in a region means they are actively doing business there. The trouble is that the guidelines for nexus are not uniform; companies may be subject to sales tax in one state but free from taxation in another.

Q. What are the different guidelines?

A. Guidelines differ from state to state, but here are a few examples:

- In California, sales tax does not apply to the sale or lease of prewritten programs if the product is transferred for download by remote telecommunications from the seller’s place of business to the purchaser’s computer and the purchaser does not obtain tangible personal property (i.e., a CD on which the software program is written).

- In Connecticut, canned, or prewritten software is considered tangible personal property and its sale, leasing or licensing (including upgrades) is taxable at 6%. Here’s where it gets tricky, though: if software is downloaded but no tangible property is transferred, the charge assessed is for computer and data processing services. That means a Connecticut retailer of downloaded software is actually a retailer of computer and data processing services and must register, collect, and remit sales tax of 1%. (more…)

Business is global – and so are taxes. Companies that are connected by common control and share resources across borders need to ensure they address transfer pricing when goods or services change hands. We wanted to share some expertise in this area through this Q&A, and you can also view an educational webcast on where transfer pricing may come into play and the best methods to use for different scenarios.

Q. What is transfer pricing?

A. Simply put, if income or deductions shift between taxpayers in different tax jurisdictions, transfer pricing comes into play. The goal from the perspective of the IRS and other tax authorities is to prevent companies from shifting income between entities in a way that may evade taxation.

For companies that have operations in different regions – whether as part of the core organization or through subsidiaries – transfer pricing is an important piece of tax law. In basic terms, transfer pricing is the determination of the price or compensation for transactions conducted between separate taxpayers based on similar arm’s length transactions with third parties. They can be directly owned companies, affiliates, brother or sister companies or entities under common control, and they can be in different parts of the U.S. or operating across international borders.

Q. How do I know if transfer pricing applies to me?

A. If you and another company have common ownership or are under common control and are transacting business together, you’ll want to be very aware of transfer pricing. A couple examples are:

A U.S.-based company with an R&D subsidiary in Israel

Here’s a case in which the level of activity abroad is a big factor in determining transfer pricing. The higher the level of risk, assets and functionality, the higher the pricing will be.

A UK company with a sales outlet in India

Again, this is not just a U.S. initiative – tax authorities worldwide consider transfer pricing a hot area. The transfer pricing level is driven by the level of operations within each jurisdiction and between such taxpayers, with slightly different rules amongst different global jurisdictions.

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