Contents - AL-Tax

6.3 Analysis Under Existing Regime 95As noted, the subset of FS’ in-hospital patient monitoring devices and systemsthat USP will sell domestically over the next 1–2 years are already FDA-approved.Hence, adjustments for the costs of obtaining FDA approval for these products arenot necessary. However, as discussed above, FS’ limited offerings of outpatientproducts have not yet been approved by the FDA for sale in the United States. IfUSP does in fact import such products for resale in its domestic market, it shouldbe compensated by FS for facilitating the FDA review process. More particularly,if a third party Contract Research Organization (CRO) is engaged to conduct thenecessary clinical trials and prepare the requisite submissions to the FDA, thesecosts should be passed through to FS (without a markup). 8 However, if USP performsthese functions internally or devotes significant resources to overseeing anunaffiliated CRO, it should mark up its internal direct and indirect costs, in thatfacilitating FDA approval does, arguably, “contribute significantly to key competitiveadvantages, core capabilities or the fundamental chances of success or failurein one or more businesses” of the controlled group.6.3.2 USP’s Sales of Tangible Property to FSConsider next USP’s sales of monitoring devices to FS. The matrix below shows thecategories of such transactions that we analyze separately.=========================================================Products Mfg’d.Products Mfg’d.by Company Xby USP-------------------------------------------------------------------------------------------------Products soldw/in Germany CASE A CASE B-------------------------------------------------------------------------------------------------Products soldo/s Germany CASE C CASE D=========================================================6.3.2.1 Recommendations: Case AIn Case A above, USP outsources the manufacture of certain outpatient productsfor export to FS, which the latter resells in the German market. Our analysis of thiscase is based on the CUP method. As previously noted, USP has sold its outpatientdevices in foreign markets through independent distributors for a number of years.One such distributor was based in Germany (“Company Y”). (This relationship wasrecently terminated, pursuant to USP’s acquisition of FS.) FS will carry most of the8 In principle, FS could contract directly with a CRO, and would not be willing to pay a fee overand above the CRO’s standard fees on an arm’s length basis unless USP, acting as an intermediary,added significant value.