The Albanian regulations reserve the profit split method for situations\u00a0in which both parties to an intercompany transaction own valuable intangible\u00a0asset. However, in many respects, a simple profit split is better suited to circumstances\u00a0in which individual group members engage in an activity that is intrinsically\u00a0multi-jurisdictional, act in concert, and employ the same types of tangible assets.<\/p>\n
<\/p>\n
The global trading of certain physical commodities (e.g., fuel oils) and the provision\u00a0of content delivery network (CDN) services are examples of activities for\u00a0which a simple profit split may produce reasonable results. Global trading firms\u00a0have traditionally employed financial capital primarily (although such capital is generally invested in physical commodities in some form at any given point).<\/p>\n
Given\u00a0the prevalence of mark-to-market accounting and the need to monitor and manage\u00a0risk in global trading, the market value of assets is often readily ascertainable. CDN\u00a0services providers invest predominantly in high-end servers, which are stationed\u00a0in proximity to the end-users of digital content in numerous geographic locations.<\/p>\n
While the book value of these servers will differ from their market value after a\u00a0comparatively short period of time, the proportional divergence between book and\u00a0market values will be similar across entities if all group members employ the same\u00a0types of assets and utilize the same depreciation schedules.\u00a0In such instances (where individual group members perform the same functions,\u00a0act in concert and employ the same types of assets), a division of after-tax free cash\u00a0flows based on the book or market value of assets employed makes intuitive and\u00a0economic sense.<\/p>\n
However, if intangible assets are an important element in the activity\u00a0at issue, and they are not jointly developed and employed, a simple profit split\u00a0method will clearly not produce reliable results.<\/p>\n
In Internet-based businesses, multinational groups are often formed sequentially:\u00a0A start-up firm with operations in only one country will develop a business model,\u00a0intellectual property and vendor and customer relationships in the first instance. Geographic expansion takes the form of replicating the same nationally-based business\u00a0in individual countries. The founding firm transfers rights to its business model,\u00a0its intellectual property and, if feasible, its vendor and customer relationships, and\u00a0provides assistance both in the start-up phase and, in some cases, on an ongoing\u00a0basis.<\/p>\n
One observes this fact pattern in traditional businesses as well, when physical\u00a0proximity to customers is important and the economic activity does not require significant\u00a0investment in fixed assets, so that decentralization is not excessively costly.<\/p>\n
Under a conservative interpretation of existing transfer pricing regulations, it may\u00a0be necessary to establish arm\u2019s length charges for each individual transaction (the\u00a0transfer of a business model, software, trademarks, other intellectual property and\u00a0services). However, this approach misses the forest for the trees, and is unnecessarily\u00a0laborious. An alternative approach would entail using franchise arrangements\u00a0to determine arm\u2019s length fees for the bundle of tangible and intangible assets transferred\u00a0and services rendered.<\/p>\n
The method described above reflect certain basic\u00a0points of reference.<\/p>\n
First<\/em>, arm\u2019s length pricing data should be used significantly\u00a0more extensively, and more flexibly, than the Albanian\u00a0regulations currently provide\u00a0for.<\/p>\n Second<\/em>, where individual group members perform distinct functions, and a single\u00a0entity owns and utilizes all of the group\u2019s intellectual property, transfer pricing\u00a0issues lend themselves to the use of simple numerical standards. While obviously\u00a0imperfect from a theoretical perspective, this approach would greatly reduce compliance\u00a0costs and the potential for double-taxation, a seemingly worthwhile trade-off.\u00a0Many traditional transfer pricing issues are of this ilk.<\/p>\n Simplified profit splits may be feasible when the activity at issue is intrinsically\u00a0multi-jurisdictional and individual group members employ similar assets. In such\u00a0cases, controlled group members often perform undifferentiated functions, and have\u00a0jointly developed intangible property in the ordinary course of business.<\/p>\n Conversely,\u00a0in circumstances where the same activity is carried out in multiple, discrete jurisdictions,\u00a0and there is limited interaction among group members on a day-to-day\u00a0basis, the franchise model may yield reasonable results. In such cases, a single entity\u00a0often develops the business model and other intellectual property used by all group\u00a0members.<\/p>\n Lastly<\/em>, for complex cases involving atypical divisions of functions and\u00a0risks, and\/or where ownership of intellectual property is not concentrated in a single\u00a0group member and has not been developed jointly, a required return approach may\u00a0be warranted.<\/p>\n","protected":false},"excerpt":{"rendered":" The Albanian regulations reserve the profit split method for situations\u00a0in which both parties to an intercompany transaction own valuable intangible\u00a0asset. However, in many respects, a simple profit split is better […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[10281],"tags":[8509,8508],"class_list":["post-7203","post","type-post","status-publish","format-standard","hentry","category-online-education","tag-market","tag-transfer-price"],"featured_image_src":{"landsacpe":false,"list":false,"medium":false,"full":false},"yoast_head":"\n