Contents - AL-Tax

8.5 Conclusions 123USP should also be compensated for the costs that it incurred in rendering startupassistance during the first 6 months of FS’ operations. Under the franchise model,a markup over these start-up costs is not called for. The above-mentioned one-timefranchise fees are generally considered to be the means by which franchisors recouptheir costs in rendering start-up assistance:[Initial lump-sum] franchise fees are often understood in the franchise community as ‘paymentto reimburse the franchisor for the incurred costs of setting the franchisee up in business– from recruiting through training and manuals.’ 6It remains to determine whether USP’s fees for accounting, general and administrative,tax, legal and HR services should include a profit factor, over and abovethe associated direct and indirect costs. These services do not contribute to the “keycompetitive advantages, core capabilities or fundamental risks of success or failure”of FS. Moreover, accounting and auditing, budgeting, tax, general and administrative,HR, routine IT, general legal and related services are “specified covered services”(in the terminology of the U.S. Temporary Regulations). For these reasons,we conclude that USP is permitted to charge FS at cost (without a profit element)for such services.8.5 ConclusionsThe franchise method, which may also be construed as an application of the modifiedinexact CUT method, is the only feasible means of analyzing certain of theintercompany transactions at issue in this case (i.e., bundled intangible assets). Thecurrent transfer pricing regime does not clearly contemplate or provide for this typeof analysis.It should be noted that our analysis of this case is not based on unfoundedassumptions regarding market structure. Rather, we base our analysis on the empiricallyevident fact that franchisors almost always utilize standardized contracts:... [I]f the franchisor is to maximize its profit, economic theory generally suggests that itshould tailor its franchise contract terms for each unit and franchisee in a chain. In practice,however, contracts are remarkably uniform within chains and thus insensitive to variationsin individual, outlet and specific market conditions. Indeed, a business-format franchisormost often uses a single business-format franchising contract – a single royalty rate andfranchise fee combination – for all of its franchised operations that join the chain at a givenpoint in time. 76 See Blair, Roger D. and Francine Lafontaine, The Economics of Franchising, New York:Cambridge University Press, 2005, p. 57.7 Ibid.