Contents - AL-Tax

3.7 Global Dealing Regulations and Notice 94–40 47The subjective nature of weighting is self-evident. However, even if one couldobjectively establish the relative importance of core trading assets and activities at agiven point, these “objective” weights would not remain the same for long. Accessto financial capital and effective risk management have increased in importance overthe past several years. At the same time, the relative importance of trading expertiseand established supplier relationships has diminished with the narrowing ofpotential trading strategies, and China’s substantially increased mining and refiningcapacity.3.7.4.4 The Formulary Apportionment Methodology Is UnnecessaryAs discussed in Chapter 11, the core elements of a global commodities tradingoperation include (1) access to financing, (2) access to product, (3) a reputationfor reliability, (4) a set of administrative controls that prevents enormously costlyerrors and facilitates the effective management of risk, (5) a sophisticated IT systemthat enables traders and risk managers to track activity in real time, and (6) expertisein market fundamentals, infrastructural and logistical features, trading strategies andrisk management.With the exception of expertise possessed by traders, risk managers and logisticalspecialists (i.e., “human capital”), these core elements can be linked to specific tangibleand intangible assets, most of which can in turn be identified with individualtrading offices: The “worldwide capital” available to a trading group is fungible only if lendersagree to these terms. It is by no means always the case that a single group memberhas large credit lines and allocates borrowed funds freely among group members,as dictated by trading opportunities. Rather, in many instances, credit is extendeddirectly from third party lenders to individual group members, and the latter havelimited flexibility with regard to the reallocation of borrowed funds. Moreover,even where loans are made to a single entity that performs a centralized treasuryfunction, the relevant metric for profit split purposes (that is, the associatedintangible asset) is access to capital in the first instance, not the extent to whichindividual trading locations put the “worldwide capital” of the group at risk. Suchaccess is often measurable on an entity-by-entity basis. Where access to product is formalized in a written contract, generally only onemember of a controlled trading group is the counterparty. While other entitiesmay have assisted in the negotiation of the contract or provided pre-financing,and should be compensated accordingly, the counterparty is the legal “owner” ofthe established relationship. Where a relationship with a customer or supplier iswell-established but not formalized, an individual originator or trader will generallyhave developed the relationship in the first instance. The entity that employsthis individual should be deemed to “own” the customer or supplier relationship. Administrative controls, risk management systems and proprietary IT systemsare often developed in one trading location and used by other locations. The