How a COVID-19 Vaccine is Transferred and Valued at Arm's Length Principle in an Internal Restructuring?

Jonathan Bastian Kofoed Andersen & Marcus Hermansen

Student thesis: Master thesis


This thesis examines how an internal restructuring is carried out between affiliated companies in a Multinational Enterprise based on the Transfer Pricing Guidelines (TPG) articles 1, 6 and 9, which affect the arm's length principle, intangible assets and internal restructurings, and how Covid-19 affects these. The articles as well as the analysis' examinations of the effects of Covid-19 provide a basis for a discussion of areas where TPG may be further elaborated.
The analysis of TPG is illustrated in a self-developed case, where a Covid-19 vaccine called Adversus-Covid and the strategically important DEMPE functions were moved from the Danish parent company to its American affiliated distributor. When transferring unique intangible assets such as Adversus-Covid, where there are no comparable reference transactions, the parent company must prepare a valuation that reflects the market value of the intangible assets.
The valuation of Adversus-Covid is based on the future cash flows that the vaccine is projected to generate, which finds the present value using discount rate WACC that expresses the total market value of Adversus-Covid. The future cash flows are based upon a forecast and a terminal value. The forecast expresses the period in which there is a growth in the production and sales of the vaccine, because it is estimated that a Covid-19 vaccine could neutralize the pandemic within a period of three years. Subsequently, the future cash flows enter a steady state, where the cash flows grow at a set growth rate. The essential elements in WACC are the risk-free interest rate, the market risk premium and the beta. Worldwide financial markets have been heavily affected by Covid-19, triggering great turbulence in the stock market, due to Covid-19 creating uncertainty about the future. Under the influence of Covid-19, the Danish pharmaceutical industry has shown readiness to adapt and delivered better-than-expected results in the first 9 months of 2020. As a result, the turbulence and future uncertainty of the Covid-19 outbreak have been neutralized and the risk-free interest rate, market risk premium and beta are back at their previous levels.
Covid-19 has affected different industries and countries differently, leading to governments around the world imposing various restrictions such as curfews and travel restrictions to lower the pressure of rising infection levels. Impacts from Covid-19 have meant that low-risk affiliated companies may have increased their costs in 2020, and the principal in a centralized group structure must therefore ensure that there remains a correct arm's length compensation that reflects the changed market conditions that Covid-19 has entailed. This means that the principal bears the market risk and must therefore compensate the lowrisk affiliated companies for the extraordinary costs that have come with Covid-19

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2020
Number of pages142