Contents - AL-Tax

6.3 Analysis Under Existing Regime 97contribution consists exclusively of its intellectual property (the proprietary productspecifications that USP provides to Company X, and its trademarks and names,which FS will use). USP does not manufacture these products internally, bear anyresponsibility for logistics, carry inventories of raw materials or finished productsdestined for European markets, or bear the associated price and quantity risks. Moreover,USP has no marketing responsibilities vis-a-vis European sales. As such, FSshould compensate USP on these types of transactions as follows:1. The payment of arm’s length royalty fees for USP’s contributions of intellectualproperty; and,2. The reimbursement of Company X’s manufacturing and logistical fees, borne inthe first instance by USP.We establish USP’s arm’s length royalty rate for rights to its manufacturing andprocess technologies by application of the CUT method. More particularly, USPshould charge FS a royalty fee equal to 7%–9% of FS’ net sales to European stockingdistributors. This recommendation is predicated on USP’s internal arm’s lengthlicensing transactions (referenced in the summary of key facts), augmented by asample of ten third party technology licensing arrangements. USP should charge FSa royalty rate of 2%–4% of the latter’s net sales to European distributors for rightsto use its trademarks and names (see discussion above). 9The following simplified example illustrates these recommendations: AssumeFS’ selling price of Product Q to European distributors is $475.00 (converted fromEuros). USP’s royalty fees for manufacturing and marketing intangible assets combinedare therefore equal to $42.75–$61.75 (with an average of $52.25). Manufacturingand logistics services fees payable to Company X, for which USP isfully reimbursed, are equal to $150.00. Consequently, in total, FS should pay USPapproximately $202.25 per unit.Because FS bears advertising and promotional expenses vis-a-vis USP’s namesand marks in Europe, and does not retain income attributable to these marketingintangible assets under our proposed transfer pricing policy, it should be compensatedfor these outlays (or, more precisely, the outlays in excess of those made byUSP’s third party stocking distributors in Europe). Based on a sample of third partymarketing services providers, the markup over cost should be approximately 8.0%–10.0%.6.3.2.4 Recommendations: Case DLastly, consider the intercompany pricing of product that USP manufactures internallyfor export to FS, and FS resells to European stocking distributors (Case D in9 An analogous trademark royalty payment is not warranted under Cases A and B, because USP’sarm’s length pricing on transactions with Company Y, used to establish USP’s selling prices to FS,would have enabled Company Y to earn a return on its distribution functions alone.