Contents - AL-Tax

9.4 Analysis Under Alternative Regime 133safe harbor loan rates. Moreover, we assume that tax authorities require a comprehensivevaluation only every three years, rather than annually.9.4.1 USS’ Estimated Cost of Equity CapitalWhile the user fees collected by toll authorities may fluctuate somewhat with discretionarytravel by motorists, commuter traffic should correlate fairly closely withbroad, macroeconomic trends. For purposes of establishing USS’ beta, we utilizethe unlevered industry beta for traffic management systems in the United States,published (by assumption) by the IRS. Suppose this beta is 0.87. After relevering toreflect USS’ financial structure, we obtain a beta of 0.92. We utilize a risk-free rateof 3.5% and a market risk premium of 6.00%, consistent with the IRS’ publishedrates. Hence, USS has a required return on equity capital of 9.02%.9.4.2 Estimated Value of USS’ Equity CapitalUSS would either have commissioned a valuation within the prior two years or itwould have to prepare a comprehensive valuation in the current year. Suppose itwas in the latter position. USS could not use a discounted cash flow methodologyfor valuation purposes, inasmuch as its cost of goods is heavily influenced by theintercompany pricing of transponders, antennas, etc. One potential alternative is tocompute price-to-revenue and/or price-to-book equity ratios for all companies insimilar lines of business. If these ratios fall within a reasonably narrow range, amultiples-based analysis, using revenues or the book value of equity as the base,may yield reasonable results. (While not theoretically compelling, this approach toestablishing value may be empirically valid.)Another possible approach (either as a supplement to, or in lieu of, the multiplesapproach) would entail valuing USS’ assets directly. A number of appraisal companiesmaintain large databases that include the pricing of used equipment in thesecondary market, which may contain relevant data. 4 In principle, USS could alsobe valued by reference to the fair market value of the Group as a whole (composedof two entities in this case), with the Group-wide value parsed between USS and FPbased on informed guestimates of their relative asset values. (If the Group utilizedthis approach, FP should be required to “live with” the implied value of its assets forpurposes of determining its tax liability in Japan.) More generally, over the courseof a three-year period, there may be windows of transparency into the value of USS’assets, for one reason or another, and these data points should be exploited. (In this4 As a general proposition, if the tested party owns valuable intellectual property, the direct valuationof assets may be infeasible (although it is required under the 2005 proposed cost-sharingregulations and the Coordinated Issue Paper on cost-sharing released in 2007). However, the marketfor financial instruments backed by intangible assets is growing rapidly and may in the futureconstitute a useful source of data on the value of such assets.