The Pricing of Financial Instruments in Tax Disputes

Abstract

The pricing of uncertainties, when establishing the market value of financial instruments, is problematic in tax litigation since the outcome of the litigation is binary. Different values can be equally correct, depending on the choice of models, assumptions regarding model parameters and forecasting techniques. The purpose of this article is to illustrate the challenges for tax administrations and courts in terms of the need and ability to price uncertainties in the market valuation of financial instruments. The authors illustrate the complexities with a case based on a publicly traded instrument, which gives a lower limit of the uncertainty associated with valuation. The authors then problematize the valuation of over-the-counter traded and non-publicly traded instruments, which, due to uncertainty, tends to create leeway for tax arbitrage. This illustration shows the necessity to further understand the manner in which courts reason, the dependency on experts and the use of models.