Contents - AL-Tax

164 12 Decentralized Ownership of Intellectual Property FS has sole responsibility for developing international markets (with the exceptionsof Germany and Japan) at its own cost and risk. FS is contractually obligated to develop and promote USP’s brand identity ininternational markets (heretofore unknown outside of the United States), andindemnifies USP against all losses, damages, expenses and other costs incurredas a result of alleged claims of improper use of USP’s brand name.Under the terms of its JV agreement with FS, USP is entitled to 20% of FS’operating profits. Since USP and FS entered into this agreement, FS has establisheda number of greenfield sites in various countries. USP also purchased two otherfirms providing similar or complementary information services and forums, andagain contributed the acquired companies’ shares to FS on a cost-free basis. USPhas joint venture agreements with third parties in Germany and Japan; hence theirexclusion from FS’ territory in the intercompany JV agreement. (These third partyJV agreements pre-dated FS’ JV agreement with USP.)Due to the sheer size of the U.S. population, the fact that Silicon Valley was thelaunching pad for vast numbers of Internet start-ups and, relatedly, because U.S.consumers were among the first to fully embrace the Internet, the U.S. website hasremained the largest of the Group’s individual sites. Because it was the Group’s firstsite, it has also traveled further along the trajectory of development and maturation.Primarily in response to flagging interest among U.S. users, USP recently acquiredtwo domestic companies with complementary e-commerce businesses. Both acquisitionswere stock transactions, and the acquired companies do not have overseasoperations. FS’ sites now collectively rival the size of the U.S. site (and generatecomparable revenues and free cash flows), although they are individually muchsmaller and the markets less mature.USP has invested considerable sums in its IT platform over the past several years,primarily for purposes of refining the U.S. user interface and building scalabilityinto its system. The latter is an important issue in the United States, but much lessso in foreign markets, because the user networks are much smaller in these markets.Investments in IT are only one-quarter of those in marketing on a Group-wide basis.Such marketing is primarily Internet-based, and is designed to maximize traffic tothe Group’s sites.12.2 Transfer Pricing IssuesThis case raises the following transfer pricing issues:1. Should FS compensate USP for its contribution of the three acquired foreigncompanies’ assets, and should USP compensate FS for its partial financing ofUSP’s two domestic acquisitions (both of which were much larger than the foreigntarget companies at the time of their acquisitions)?2. How much should FS pay USP for: