Valuation of Brands and Intangibles for Tax Amortization
The standard defines intangible assets as those identifiable, without physical substance, used for the production or supply of goods or provision of services or for administrative purposes. In the current definition, “used for the production or supply of goods or provision of services or for administrative purposes” was removed and “non-monetary assets” were added; The foregoing, in addition to converging with IAS-38, specifies said definition and allows the use of a more generic term.
Appraisal of Intangibles – Tax Amortization of Intangible Assets (Trademarks, Patents, Industrial Secrets, Considerations etc…)
I. Conceptualization and Recognition Diagram for the Appraisal of Intangible Assets:
According to the Financial Information Standards (NIF) issued by the Mexican Institute of Public Accountants (IMPC) and the Mexican Council of Financial Information Standards, AC (CINIF).
“The amortizable amount of an intangible asset should be allocated on a systematic basis over its estimated useful life, unless it has an indefinite life.“.
"Intangible assets can be bought, sold, licensed, or rented and are subject to private property rights, which ensures a legal basis for the transfer."
II. Legal/Fiscal Framework:
For the purposes of tax law, intangibles such as brands, have the character of deduction as investments, specifically in the type of deferred expenses, therefore, the provisions of article 25, section IV must be strictly observed; 32 and 33 section III below and other relatives of the Income Tax Law that state:
Income Tax Law
Taxpayers may make the following deductions:
For the purposes of this Law, are considered investments fixed assets, bills and charges deferred and the disbursements made in pre-operating periods, in accordance with the following concepts:
Fixed assets are the set of tangible assets that taxpayers use to carry out their activities and that are depreciated due to their use in the taxpayer's service and over time. The acquisition or manufacture of these assets will always have the purpose of using them for the development of the taxpayer's activities, and not to be disposed of within the normal course of their operations.
Deferred expenses are intangible assets represented by goods or rights that allow reducing operating costs, improving the quality or acceptance of a product, using, enjoying or exploiting a good, for a limited period, less than the duration of the activity of the moral person. Intangible assets that allow the exploitation of assets in the public domain or the provision of a concessioned public service are also considered deferred expenses.
Deferred charges are those that meet the requirements indicated in the previous paragraph, except those related to the exploitation of assets in the public domain or the provision of a concessioned public service, but whose benefit is for an unlimited period that will depend on the duration of the activity of the Moral person.
Disbursements made in pre-operational periods are those whose purpose is research and development, related to the design, production, improvement, packaging or distribution of a product, as well as the provision of a service; provided that the disbursements are made before the taxpayer disposes of his products or renders his services, on a constant basis. In the case of extractive industries, these expenditures are those related to exploration for the location and quantification of new deposits capable of being exploited.
The maximum authorized percentages in the case of deferred expenses and charges, as well as for the disbursements made in pre-operative periods, are the following:
YO. 5% for deferred charges.
II. 10% for disbursements made in pre-operative periods.
III. 15% for royalties, for technical assistance, as well as for other deferred expenses, except for those indicated in section IV of this article.
IV. In the case of intangible assets that allow the exploitation of assets in the public domain or the provision of a concessioned public service, the maximum percentage will be calculated by dividing the unit between the number of years for which the concession was granted, the quotient thus obtained It will be multiplied by one hundred and the product will be expressed as a percent.
In the event that the benefit of the investments referred to in sections II and III of this article materializes in the same financial year in which the disbursement was made, the deduction may be made in its entirety in said financial year.
It is important to point out that article 33 of the LISR establishes two maximum percentages, the first of the 15% (section III) and another to 100% (last paragraph), the latter may only be used if the benefit materializes in the same year that the disbursement was made, that is to say, if in that same year the benefit of the brand was obtained, also in that same year the royalties for it were paid.
III. Identification of Intangible Assets and Applied Valuation Methodologies:
IDENTIFICATION OF INTANGIBLE ASSETS
- Trademarks (Nominative, Unnamed, Three-Dimensional, Mixed)
- Market Image
2) Related to Customer Portfolio
- Client list
- Contracted Production
- Contract with Clients
- Non-Contractual Relations
3) Intellectual or Artistic (Copyright)
- Theatrical works, operas, ballets
- Books, magazines, newspapers, Paintings, Photographs
- Audiovisual materials etc...
IV. Most Used Models for Valuation:
- Relief from Royalty Method
- DCF (Dynamic Residual)
- Differential Value Methods
- INTERBRAN Method
- VC Approach
V. Scope and steps of the service for tax amortization of intangibles:
SCOPE AND SERVICE STEPS
Requirements Gathering and General Consulting
Legal and Financial Due Diligence
Financial and Tax Analysis of Intangibles
SC Consultant Firm (1)
Success Fees (2)
(1) Consultant specialized in the matter, which has moral, legal and professional quality, in addition to historical success stories before the SAT, to issue corroboration and validity through its signature to achieve the correct tax amortization as imposed in the isr law art. 33.
(2) Positive registration of the intangible beginning of tax savings for effective consulting.
Audited Annual Financial Statements for the last 5 years
Copies of annual statements for the last 5 years
Company Legal Information:
Articles of incorporation and relevant underlying changes, if any.
Name of the owner of the intellectual property and document that grants said intellectual property before the IMPI or INDAUTOR.
In case there are collective exploitation contracts.
Geographical coverage of the services offered by intellectual property Segmentation of sales for each of the brands, patents, utility models or industrial secrets that are under consideration.
Duly recognized intangible assets have tax benefits such as tax amortization (Art. 32 and 33 LISR) and when they are managed correctly they have the tax benefits of the CUCA (Art.78 of the LISR).
Intangible Assets are a tool of scientific knowledge applied to the recognition of their value in the Corporate Heritage. Based on the Premises of the New Economy, the preponderance of Intangible Assets is increasing, identify them, recognize them, value them, manage them and plan their investment.
Are you interested in Valuing an Intangible Asset for registration in your balance sheet and capitalization for tax or financial benefits?