Contents - AL-Tax

4.6 Franchise Model 63relationship to the relative value of assets that they each employ. In contrast, ownershipshares in a joint venture company will reflect each entity’s relative contributionsof tangible and intangible assets over the term of the JV partnership, as anticipatedat the outset.Joint venture arrangements and other types of strategic alliances have proliferatedover the past two decades, expanded well beyond high-technology, high-risk undertakingsto include more mundane, low-tech ventures, and combined complementaryassets and other resources in an enormous variety of ways. As such, the pool ofpotentially comparable JV arrangements is quite large.4.5 Financial or Tangible Asset-Based Profit SplitAs detailed in Chapter 3, the U.S. regulations reserve the profit split method for situationsin which both parties to an intercompany transaction own valuable intangibleassets. However, in many respects, a simple profit split is better suited to circumstancesin which individual group members engage in an activity that is intrinsicallymulti-jurisdictional, act in concert, and employ the same types of tangible assets.The global trading of certain physical commodities (e.g., fuel oils) and the provisionof content delivery network (CDN) services are examples of activities forwhich a simple profit split may produce reasonable results. Global trading firmshave traditionally employed financial capital primarily (although such capital isgenerally invested in physical commodities in some form at any given point). Giventhe prevalence of mark-to-market accounting and the need to monitor and managerisk in global trading, the market value of assets is often readily ascertainable. CDNservices providers invest predominantly in high-end servers, which are stationedin proximity to the end-users of digital content in numerous geographic locations.While the book value of these servers will differ from their market value after acomparatively short period of time, the proportional divergence between book andmarket values will be similar across entities if all group members employ the sametypes of assets and utilize the same depreciation schedules.In such instances (where individual group members perform the same functions,act in concert and employ the same types of assets), a division of after-tax free cashflows based on the book or market value of assets employed makes intuitive andeconomic sense. However, if intangible assets are an important element in the activityat issue, and they are not jointly developed and employed, a simple profit splitmethod will clearly not produce reliable results.4.6 Franchise ModelIn Internet-based businesses, multinational groups are often formed sequentially:A start-up firm with operations in only one country will develop a business model,intellectual property and vendor and customer relationships in the first instance.