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Valuation Services for §861 Interest Expense Allocation Calculations

To calculate taxable US income, the Internal Revenue Code includes numerous provisions for how expenses and deductions should be measured against income. For multinational companies, either US- or foreign-based, these calculations are complicated by the need to follow specific guidance to determine income and expenses generated from within and outside the United States.

Under the §861 Treasury Regulations, taxpayer guidance is provided for various types of deductions, and while gross income is used as the basis for apportioning most deductions, interest expense rules, under IRC §864(e)(2), are unique in that apportionment is based on a value of assets methodology.

To apportion interest expense, the guidance from the Treasury Regulations provides three alternative methods for taxpayers to determine asset values:

  • Tax book – §861-9T(g)
  • Alternative tax book – §861-9T(e)
  • Fair market value – §861-9T(h)

What we do
American Appraisal provides objective and experienced valuation services for taxpayers using or considering the fair market value method.

In our experience, clients desire varying levels of support from external service providers, including:

  • Clients that need valuation guidance in order to develop their own internal valuation analysis.
  • Clients looking for a turnkey first-year analysis that they intend to internally update going forward, with periodic reviews by an external valuation specialist.
  • Clients looking for a multiyear turnkey valuation plan for developing and maintaining the analyses appropriate to support the apportionment calculations.

Regardless of the level of service provided, American Appraisal recognizes the complexity and ramifications of valuing large quantities of assets in various parts of the world. American Appraisal’s global footprint, the depth of our tangible asset valuation expertise and our team’s experience with complex §861 studies benefit the clients we serve.

Our Processes
When American Appraisal is retained to develop value opinions for a first-time election, we begin by working with client models to understand the apportionment sensitivity to changes in domestic or foreign PP&E asset values. This enables us to refine our scope of work and direct the valuation work effort to the most relevant groupings of assets.

In situations where the fair market value method is already in use, we also begin with diagnostics designed to understand the apportionment calculation sensitivity, and we pay close attention to the prior scope of work, approaches and methodologies used and any prior challenges from the IRS.

Understanding these historical elements is a critical step given the importance the IRS places on consistency with §861 work. It also enables us to make more informed best-practice decisions about our intended scope of work, approaches and methodologies.

There is no preconceived template for a successful study, so American Appraisal works closely with each client to develop an appropriate service that meets expectations. There are, however, several critical elements. A work plan should

  • Develop substantive and supportable valuation services that anticipate IRS scrutiny.
  • Follow generally accepted valuation principles that align with the Treasury Regulations.
  • Enable efficient valuation updating that can be sustained over time, since annual apportionment reporting is required.
  • Consistently apply procedures and methodologies across all borders.
  • Since most valuations of tangible assets involve asset groupings of various significance, focus primarily on those that comprise the most significant capital investments. Often referred to as the 80/20 rule in valuation, this “rule” suggests that 80% of value is typically represented by 20% of the physical assets.
    • For §861 work, primary efforts are typically focused on the top 65% to 80% (cost and/or net book value basis) of capital-significant assets.
    • The most capital-significant assets are valued using robust valuation methods, whereas less capital-significant assets are often valued using other methods that save time and expense.

Our Credentials

  • American Appraisal has provided valuation services for tax purposes for more than 50 years, and our exclusive focus on valuation and related business matters ensures that clients receive best-practice valuation service.
  • Our extensive global footprint and depth of tangible asset valuation expertise ensure that consistent procedures and methodologies are applied for similar assets across all borders.
  • Our team has significant experience with complex §861 studies, and our analyses are designed to anticipate IRS scrutiny and to be efficiently maintained over time.

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