Contents - AL-Tax

140 10 Provision of CDN Services to Third Parties10.2 Transfer Pricing IssuesAs noted, given the facts outlined above, we conclude that the Group’s foreign affiliatessimply permit USP to utilize their network infrastructure assets (servers, routersand switches) in rendering CDN services to third parties. Hence the transfer pricingissue: What is an arm’s length fee for exclusive access rights to these assets?10.3 Analysis Under Existing RegimeAs reviewed in Chapter 3, two of the transfer pricing methods governing intercompanytransactions in tangible property presuppose that ownership rights to suchproperty are transferred in their entirety. More particularly, both the resale priceand cost plus methods presuppose that tangible property is sold outright and usedor resold by the recipient. These methods do not apply where the transactions atissue are not structured in this way. As such, only the comparable uncontrolled price(CUP) method and the comparable profits method (CPM), which are able to accommodatemore diverse types of transactions in tangible property, can in principle beapplied in this case.At first blush, the transactions in tangible property between USP and its foreignaffiliates resemble lease arrangements. However, under a lease, the lessee iseffectively treated as the owner of the leased assets, and has all of the associatedrights and responsibilities during the lease term. This is not true of USP’s accessrights to its foreign affiliates’ infrastructure assets. Rather, the latter retain legalownership of their infrastructure assets, along with all of the attendant obligationsand risks. Therefore, if, under the CUP method, one were to look to arm’s lengthlease fees for dedicated servers to establish the foreign affiliates’ pricing of accessrights to their servers, these lease fees would have to be adjusted to reflect the differingallocations of legal rights, risks and responsibilities. Such an adjustment woulddepend on the specific features of the comparable arm’s length lease arrangements,including: The duration of the lease relative to the useful life of the equipment; The right of the lessee to terminate the lease before its stated term expires; and, Rights to sublease.These factors influence the degree of risk assumed by an arm’s length lessee.Quantifying the monetary effects of such differences in risks is both challengingand inexact. Moreover, the use of lease arrangements as CUPs, even if adjusted asrequired, may incline taxing authorities to treat USP as having permanent establishmentsin all countries in which its foreign affiliates operate.Under the comparable profits method, one would establish USP’s arm’s lengthfees, payable to its foreign affiliates, by reference to standalone firms in the business