Contents - AL-Tax

Chapter 8Replication of Internet-Based Business ModelDespite the fact that national boundaries do not exist in cyberspace, customers indifferent countries are clearly more adept at navigating and transacting on websitesdesigned by domestic companies, with a “look-and-feel” and user interface featureswith which they are familiar. Moreover, legal restrictions vis-a-vis e-commerce varyto some degree by country, making firms similarly more comfortable dealing withcustomers in their own geographic “backyard”. (For example, the treatment of proprietarycustomer data is more highly regulated in European countries, as comparedwith the United States.)As a result of these national differences, many e-commerce businesses haveexpanded through a process of replication, beginning in one geographic market andsequentially expanding to other geographic markets (with certain market-specificmodifications as needed). This method of expansion poses certain difficulties vis-avistransfer pricing, because a unique (and potentially patented) business model isgenerally among the intangible assets transferred intercompany. However, businessmodels per se are generally not transferred or sold individually, absent the sale of agoing concern or the license of a franchise.Our fourth case study involves a U.S. parent company (“USP”) and a Europeansubsidiary (“FS”). USP has developed a novel e-commerce business in its domesticmarket, which has proven to be very successful, and is in the process of expandinginto Europe. We analyze this case, which typifies the difficulties noted above, underthe franchise model. It is not amenable to analysis under the existing regime.8.1 Summary of Key FactsUSP is an online marketing services company that enables its customers—webbasedfirms and traditional retailers with a presence on the Internet—to target emailadvertisements to relatively small subsets of consumers, based on detailed statisticalanalyses of purchasing patterns by gender, age, geographic location, level ofeducational attainment, home ownership and value, and other pertinent variables.More particularly, USP performs extensive data analysis (utilizing both internal andexternal data sources), develops creative content and formulates highly customizedE. King, Transfer Pricing and Corporate Taxation,DOI 10.1007/978-0-387-78183-9 8, C○ Springer Science+Business Media, LLC 2009115