Contents - AL-Tax

10.4 Analysis Under Alternative Regime 141of providing access to their network infrastructure assets. 2 For example, standalonedata centers are logical “candidate” comparables, inasmuch as they permit firmswithout their own Internet-facing infrastructure to utilize data center infrastructureto host their websites. Data centers ordinarily provide additional support servicesas well, for which one would have to adjust before comparing data centers’ profitlevel indicators with those of USP’s foreign affiliates. However, most data centersare either privately held or part of much larger, vertically integrated or horizontallydiversified firms. As such, financial results on data center operations per se are veryhard to come by.The alternative under the comparable profits method, again, is to wander furtherafield in search of quasi-comparable firms. However, this will render one’sresults much less reliable. Accordingly, the current regime does not provide asatisfactory means of analyzing the transactions between USP and its foreignaffiliates.10.4 Analysis Under Alternative RegimeAs described in detail in Chapters 4 and 9, the required return methodology wouldoften be extremely laborious absent certain conventions to which tax authoritieswould agree in advance. However, a much simpler variant of the required returnmethod is applied in this case.One can view USP’s use of hardware owned by its foreign affiliates as being economicallyequivalent to the following series of transactions: (a) foreign Group membersborrow capital for purposes of purchasing edge and storage servers, routers andswitches (with the latter serving as collateral); (b) individual foreign affiliates permitUSP access rights to their equipment; and, (c) USP compensates its foreign affiliatesboth for the cost (or value) of their equipment and for their cost of capital.The U.S. transfer pricing regulations contain safe harbor provisions as applied toloans. Safe harbor loan rates (or “Applicable Federal Rates”) for short-term, midtermand long-term loans are published on a monthly basis by the Internal RevenueService. Short-term rates apply to loans with maturities of 3 years or less, mid-termrates apply to loans with maturities of between 3 and 9 years, and long-term ratesapply to loans with maturities of more than 9 years. For purposes of our analysis,we utilize the mid-term rate of 4.46% published in February 2008.We assume that the Group’s foreign members would have to pay back theirrespective loan principal in equal monthly installments over their terms (equal, inturn, to the useful life of the network infrastructure equipment that they purchasewith the loan proceeds). Assuming that the servers (and other equipment) at issue2 While USP’s foreign affiliates permit third parties to access their network infrastructure assets,this is done purely through informal barter (or peering) arrangements with owners of complementaryinfrastructure assets, which in turn provide connectivity. These reciprocal rights cannot readilybe valued.