Development, transfer, and evaluation of intangibles in taxation

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Although there are three basic approaches to the evaluation of intangibles in accounting, (1) estimated market value, (2) estimated future cash flow, and (3) actual cost to develop, they do not have enough reliability and verifiability for tax purposes. Thus, we have to establish tax system that works well without evaluating intangibles.In order to reduce the needs for the evaluation of intangibles, tax-free reorganization should be expanded by permitting cash as consideration, and the requirement of the entity evaluation in stock for stock acquisition and in the beginning of consolidated return should be abolished. Although losses of a new consolidated member would be brought into a consolidated group, their deduction should be limited. The existing evaluation requirements in the corporate tax law are imperfect, because intangibles might not be covered, which causes tax avoidance or entrenchment on Japanese tax jurisdiction through corporate inversion transactions.In taxable transactions, it is inevitable to tax intangibles traded in the transaction. Tax authorities have to make a decision on whether they accept the consideration for the intangibles that private parties negotiated. In that decision, the tax authorities should compare the incentives of private parties to earn more before tax profits and their incentives to reduce tax burden. If the former is larger than the latter, the tax authorities should accept the consideration.