Contents - AL-Tax

178 12 Decentralized Ownership of Intellectual Property FS’ projected cash outlays (which should be treated as USP’s expenses),including:– Projected intangibles-creating marketing and promotional expenses;– Projected investments in tangible assets and working capital; and,– Projected cash operating expenses. Projected investments in the further development of USP’s IT platform thatwould otherwise be borne by FS; All site operations expenditures allocable to FS’ territory; and, The estimated tax costs of operating in this manner (given the likelihood thatUSP would be deemed to have permanent establishments in FS’ markets).In computing the net present value associated with the “self-develop and license”option, USP’s projected after-tax free cash flows should incorporate the followingcomponents: FS’ projected net revenues, multiplied by an arm’s length royalty rate for rightsto use USP’s successively refined platform in international markets (which wouldconstitute USP’s licensing income); Arm’s length fees payable by FS to USP for site operations support; Projected investments in the further development of USP’s IT platform thatwould otherwise be borne by FS; and, The estimated tax costs on licensing and services fee income earned by USP.In computing the net present value associated with a JV arrangement, one wouldpresumably assume that the (hypothetical) JV agreement would be identical to theactual JV agreements between USP and third parties. Projected free cash flows intotal (half of which would accrue to USP) should reflect: The JV company’s projected revenues and cash outlays (as defined above) in FS’territory; Projected investments in the further development of USP’s IT platform thatwould otherwise be borne by FS; Site operations expenses allocable to FS; Projected interest costs; and, Projected tax costs.Each option should be discounted at a different rate, reflective of the associatedrisks. The option that yields the highest net present value can be used to establishthe minimum buy-in payment that FS should make to USP under the cost-sharingarrangement. USP should be indifferent between (a) the cost-sharing option, and(b) the “self-develop and exploit internally” option, the “self-develop and license”option or the JV option (depending on which has the highest net present value). Thenet present value of the cost-sharing option should incorporate FS’ buy-in payment,its ongoing fees for site operations services rendered, USP’s associated site operationsexpenses, FS’ cost-sharing contributions and USP’s associated tax costs. Thediscount rate applied to projected after-tax free cash flows under the cost-sharing