Contents - AL-Tax

4.1 Modified Comparable Uncontrolled Price Method 53members’ equity capital. (The cases analyzed in Chapters 9 and 10 illustrate therequired return methodology, as well as the resale price and simplified profit splitmethods.) Simplified Profit Split and Joint Venture Models. For cases in which ownershipof highly valuable intellectual property is not centralized in one entity,the apportionment of a controlled group’s combined after-tax free cash flowscan also be based on (a) the relative values of tangible and intangible assetsemployed by individual group members, where such values can be determinedwith reasonable accuracy, or (b) the ownership shares of unrelated joint venturepartners, where individual joint venture partners’ asset contributions correspondapproximately to those that individual members of the controlled group make.(Alternatively, joint venture agreements may provide for various formulaic divisionsof income.) Both of these approaches preserve the nexus between after-taxfree cash flows and asset values. The second approach also eliminates the needto value assets explicitly and to draw unfounded inferences regarding the relativefair market values of assets from observable, but largely irrelevant, factors.Ownership shares in joint ventures are an accurate gauge of the relative value ofcontributions that each partner makes (or will make), as determined by the partiesat the outset. (The case studies in Chapters 10 and 11 illustrate the proposedsimplified profit split method, along with the required return method and theformulary approach. Chapter 12 illustrates the joint venture method and the 2005proposed cost-sharing regulations, along with the residual profit split method.) Franchise Model. Where there is no real division of labor among the individuallegal entities that comprise a multinational corporation, but (a) one entitydeveloped a core business model and other intangible assets on which theremaining legal entities subsequently based their operations, and (b) each entityoperates largely independently in a distinct geographic territory, one can utilizearm’s length franchise arrangements to determine the arm’s length division ofincome among group members in different taxing jurisdictions. (This approachdoes not presuppose that individual licensor of unique intellectual propertywould separately negotiate the same royalty rate and other license terms for“comparable” intellectual property, or that a single licensor of unique intellectualproperty would invariably offer the same terms to each of its licensees. Rather,it is empirically true that individual franchisors offer standardized terms to theirfranchisees). The case study in Chapter 8 illustrates the proposed franchisemodel approach.Each of these supplementary or alternative approaches to transfer pricing arediscussed at greater length below.4.1 Modified Comparable Uncontrolled Price MethodThe proposed modified comparable uncontrolled price method would simply providefor more flexible applications than the current version of this method. Pricesgenerally contain useful information that can be exploited in one form or another,