Contents - AL-Tax

12.4 Analysis Under Alternative Regime 171require only a fraction of the scalability built into USP’s platform. This substantiallydiminishes the value of USP’s IT platform in international markets. Consistentwith the residual profit split method in general, we parse USP’s IT platform valueinto its component parts (scalability and “all other”) based on relative IT expenditures.This analysis suggests that approximately 60% of the value of USP’s ITplatform is attributable to scalability. Hence, whereas USP’s contribution of intellectualproperty constituted 23%–27% of the value of all intangible assets used ininternational markets under our initial assumptions, it now constitutes only 9.2%–10.8%, after giving effect to the fact that scalability has de minimis value in internationalmarkets. (As noted above, in addition to this share of FS’ residual profits,USP is also entitled to site operations services fees under the residual profit splitmethod.)Lastly, we eliminate our assumption that USP’s IT platform and FS’ active userbase have uniform useful lives. The former has an estimated useful life of six years,and the latter, two years. Incorporating this element into our analysis decreases therelative value of FS’ intangible assets and increases the percentage of FS’ residualincome that should accrue to USP. (USP’s services fees for routine functionsperformed remain unchanged.)12.4 Analysis Under Alternative RegimeAs noted, taxing authorities generally do not consider joint venture arrangementsbetween unaffiliated companies to be reliable comparable uncontrolled transactions.JV partners could conceivably collude to reduce their combined tax liability andcompensate their opposite number through side transactions. More generally, JVpartners’ incentives are intrinsically more suspect than companies that have nomutual interests. 5This position is somewhat ironic, in that the relationships among members ofa controlled group are more closely akin to a JV partnership than to two or morecompanies acting to maximize their individual profits. Moreover, in this instance,USP negotiated arm’s length JV agreements with German and Japanese partnersalmost concurrently with its intercompany JV agreement with FS. The arm’s lengthJV partnerships permit the separate JV companies to utilize USP’s IT platform andbrand identity, and USP performs ongoing software development, customization andsite operations services on their behalf.We use USP’s (uniform) third party JV arrangements to establish arm’s lengthconsideration for (a) FS’ use of USP’s IT platform and brand identity, and (b) USP’s5 Moreover, the U.S. proposed cost-sharing regulations (issued in 2005) and the Coordinated IssuePaper on cost sharing (released in 2007) reflect the drafters’ belief that unaffiliated research jointventure partners routinely contribute pre-existing intellectual property of approximately equalvalue to their JV arrangement. As such, the drafters argue, intercompany cost-sharing arrangements,in which one party contributes only financing, are readily distinguishable from third partyresearch joint venture partnerships.