Contents - AL-Tax

142 10 Provision of CDN Services to Third PartieshaveausefullifeofT months, and a value of V s , individual foreign Group memberswould repay the following amount in principal per month:V sT(10.1)Additionally, in month 1, individual foreign Group members would pay an interestcharge equal to V s (i/12), in month 2, V s (T − 1/T )(i/12), and in month t:( )( )T − (t − 1) iV sT 12(10.2)Therefore, the total amount that USP would pay in intercompany fees to individualforeign affiliates over T months (or T/12 years), equal, in turn, to the foreignaffiliates’ interest fees and repayments of principal, is given by:V s + V sT∑( ) i[T − (t − 1)]12t=1(10.3)The monthly equivalent of Equation (10.3) (that is, the amount that USP wouldpay each of its foreign affiliates per month for access rights to their respective infrastructureassets) is given by:V sT + V s( T − (t − 1)T)( ) i12(10.4)The foreign affiliates’ monthly infrastructure-related operating expenses areapproximately equal to the depreciation of servers, V s /T . Therefore, dividing theabove equation by this magnitude (equivalently, multiplying through by T/V s ), weobtain the foreign affiliates’ markup over associated costs in month t:( ) i1 + [T − (t − 1)]12(10.5)For purposes of our transfer pricing analysis, we assume that T is equal to 36months (the period of time over which the Group depreciates its servers). SubstitutingT = 36 and i = 4.46% (the relevant Applicable Federal Rate) into Equation(10.5), we obtain a markup, in month 1, of 1.1338, or 13.38% over depreciationexpenses. The markup in month 12 is equal to 1.0925, or 9.25% over depreciationexpenses. (This figure declines over time because the interest cost componentdiminishes as the principal is repaid.) On average during the first year, USP shouldpay its foreign affiliates a markup of 11.32% over the latter’s depreciation expenses.