Uncertainty in business valuation for tax purposes

Abstract

An important but often neglected aspect in business valuation for tax purposes is uncertainty. It is known in the literature that changes in economic structure, people's behavior, business risk, or political leader are expected. Unfortunately, these factors cannot be effectively measured and reported in business valuation for tax purposes. As such, most business valuations for tax purposes are unable to capture uncertainty adequately. Valuation reports under a tax investigation process only present an estimated value in the form of a single value, which is unable to represent uncertainty sufficiently. This paper aims to demonstrate a method to quantify uncertain variables into the business valuation for tax purposes. The research engaged scenario analysis to arrive in three different possible value estimates, and Monte Carlo simulation to take uncertainties into accountto produce a frequency distribution containing all possible values between predetermined limits. Using the range of value produced in the simulation, a taxpayer will have more complete information to decide whether taxpayers submit an undervalue report or not.