Contents - AL-Tax

64 4 Some Alternative Approaches to Transfer PricingGeographic expansion takes the form of replicating the same nationally-based businessin individual countries. The founding firm transfers rights to its business model,its intellectual property and, if feasible, its vendor and customer relationships, andprovides assistance both in the start-up phase and, in some cases, on an ongoingbasis. One observes this fact pattern in traditional businesses as well, when physicalproximity to customers is important and the economic activity does not require significantinvestment in fixed assets, so that decentralization is not excessively costly.Under a conservative interpretation of existing transfer pricing regulations, it maybe necessary to establish arm’s length charges for each individual transaction (thetransfer of a business model, software, trademarks, other intellectual property andservices). However, this approach “misses the forest for the trees,” and is unnecessarilylaborious. An alternative approach would entail using franchise arrangementsto determine arm’s length fees for the bundle of tangible and intangible assets transferredand services rendered.4.7 SummaryTo summarize briefly, the proposed methods described above reflect certain basicpoints of reference. First, arm’s length pricing data should be used significantlymore extensively, and more flexibly, than the U.S. regulations currently providefor. Second, where individual group members perform distinct functions, and a singleentity owns and utilizes all of the group’s intellectual property, transfer pricingissues lend themselves to the use of simple numerical standards. While obviouslyimperfect from a theoretical perspective, this approach would greatly reduce compliancecosts and the potential for double-taxation, a seemingly worthwhile trade-off.Many traditional transfer pricing issues are of this ilk.Simplified profit splits may be feasible when the activity at issue is intrinsicallymulti-jurisdictional and individual group members employ similar assets. In suchcases, controlled group members often perform undifferentiated functions, and havejointly developed intangible property in the ordinary course of business. Conversely,in circumstances where the same activity is carried out in multiple, discrete jurisdictions,and there is limited interaction among group members on a day-to-daybasis, the franchise model may yield reasonable results. In such cases, a single entityoften develops the business model and other intellectual property used by all groupmembers. Lastly, for complex cases involving atypical divisions of functions andrisks, and/or where ownership of intellectual property is not concentrated in a singlegroup member and has not been developed jointly, a required return approach maybe warranted.