Austrian Guide on the Ukraine War and Valuation
TP Ticker – April 2022
The invasion of Ukraine by Russian forces since 24 February 2022 has already shown substantial effects on the global economy; comparable in scale with the spread of the coronavirus pandemic in 2020. Obviously, this has also its effects on business valuations and practitioners – again – face the problem on how to address these in their own valuation, also in transfer pricing. On 20 April 2022, the Austrian Chamber of Tax Advisors and Public Accountants (“Kammer der Steuerberater und Wirtschaftsprüfer”) published formulated guidelines on the effects of the war on business valuation (“Zu den Auswirkungen des Krieges in der Ukraine auf Unternehmensbewertungen”). The main topics addressed are the cut-off date principle, financial surpluses, the cost of capital, and multiples.
Cut-Off Date and Financial Projections
Regarding the cut-off date principle, the guidelines clarify, that for valuation dates until the 23 February, no effects of the war are to be considered, while for later valuation dates it is necessary to determine which information on the effects of the war were obtainable at this time with due diligence and what quantification of these effects was possible with reasonable likelihood. For the projection of financial surpluses, it will be necessary to confirm which direct and indirect effects of the war exist. Direct would be such effects that relate to direct investments or markets in either Ukraine or Russia. Indirect effects relate to factors such as increases in the prices of energy and raw materials, disturbances in procurement and supply chains, as well as influences from changes in macroeconomic factors such as inflation and interest rates.
Cost of Capital and Multiples
For the cost of capital, the guidelines note that the markets are still volatile and that no final conclusion on the market premium can yet be reached. The suggestion for now is to continue applying the existing recommendation (for Austria, a market premium of 7.5 to 9 percent before personal taxes). On the beta-factor, it is notes that due to the combination of current with the previous pandemic-related distortions of the market, the estimates require special consideration of their reliability. Similarly, it is advised to examine the reliability of multiples determined from data before the war as these, too, may already suffer from distortions due to the pandemic.
Our Thoughts
From a transfer pricing (“TP”) perspective, the new Austrian guidelines do not provide any surprises on the technical level but reiterate guidance that was in a similar way already given by other guidance on the pandemic. An interesting aspect, though, is that the Austrian guidance on business valuation recommends addressing increased uncertainties due to the war not by modifying the discount rate, but rather by developing different financial scenarios and weighting them according to their likelihood. This is consistent with the OECD-TP guidelines, which also strongly endorse such an approach for pricing intra-group restructuring. While this is by now rarely observed in practice, it can be expected that the general trend in business valuation for this approach will also become more common in TP contexts in the near future.
The guidelines of the Austrian Chamber of Tax Advisors and Public Accountants on the effects of the war in Ukraine on business valuation can be found online here: https://www.ksw.or.at/PortalData/1/Resources/services/2022_04_11_FH_AuswirkUkraineKrieg_auf_UB_RF2_pdfA.pdf