Contents - AL-Tax

8.4 Analysis Under Alternative Regime 121Hence, for purposes of our transfer pricing analysis, we liken USP to a franchisorand FS to a franchisee and determine the former’s arm’s length consideration on thisbasis. However, despite our aggregation of most intercompany transactions, USPshould be separately compensated for certain ongoing services that it will renderto FS, but that franchisors do not routinely provide to their franchisees. Such servicesinclude accounting, tax, HR and legal support services. In contrast, USP’sMarketing and IT Groups’ activities serve primarily to enhance and refine its proprietarybusiness model and systems, and USP should not charge FS a separate feetherefor. Stated differently, USP will be fully compensated for most of these activitiesthrough its franchise fee. 4 Moreover, the regular meetings that USP’s seniorexecutives hold (via conference call) with FS’ Managing Director are similar to themeetings, conferences and newsletters that independent franchisors utilize to transferknow-how and disseminate information on an ongoing basis to their franchisees.As such, USP will be compensated for these latter contributions by means of itsfranchise fee as well.In sum, given the range of intangible assets that USP has transferred to FS, thefact that third parties do not typically license or buy and sell business concepts andsystems in isolation, and the fact that USP’s relationship with FS closely resemblesthat of a franchisor with a franchisee, we conclude that bundling transactionswill yield the most reliable results under the Best Method Rule in this instance. Inanalyzing these bundled transactions, we therefore look to arm’s length franchisearrangements.Bond’s Franchise Guide, an annual publication, is widely considered to be themost comprehensive source of information on U.S. franchises. 5 We developed oursample of comparable arm’s length franchise arrangements through a review of allfranchises included in this Guide and listed in the following categories: Business: Advertising & Promotions Business: Internet/Telecommunications/MiscellaneousThrough this process, we identified five broadly comparable franchise arrangements,summarized briefly below.1. Coupon Cash Saver: A direct mail Internet coupon company. Specializes indesigning ads for customers that increase their sales. Franchisor instructs franchiseeson system, customer acquisition and customer retention. Provides siteselection assistance, cooperative advertising, central data processing, centralizedpurchasing (at additional cost), field operations evaluation, field training andinventory control. Established in 1984. Has ten company-owned units and twofranchised units. Franchisees are required to pay an up-front fee of $9,500 and aroyalty of 6.0% of net sales on an ongoing basis.4 However, USP should be separately compensated for the relatively generic IT maintenance andsupport services that it will render and for the customizaton of its software for the European market.5 Bond, Robert E., Bond’s Franchise Guide (2007 Edition), California: Source Book Publications,2007.