Porter Analysis: A Business Strategy of Amazon.

com through a Value

Chain and Comparative Advantage Analysis of Amazon’s Trademarks
and Intangibles

Charles Edward Andrew Lincoln, IV*

Table of Contents
Table of Contents .................................................................................................................... 1
I. Introduction: ................................................................................................................. 2
II. Industry Analysis: ................................................................................................... 2
IV. Company Analysis:.................................................................................................. 5
IV.I.2 Explanation of Value Chain analysis:....................................................................................... 8
V. Intercompany Transaction: ................................................................................. 9
V.I.1 Functions, Assets, Risks (FAR) Analysis within the Comparable Profits
Margin Analysis...................................................................................................................................................................10
V.I.2 Functions, Assets, Risks (FAR) Analysis within the Comparable Profits
Margin Analysis Application ..................................................................................................................................11
VI. Best Method and Why: ......................................................................................... 12
VII. Search Strategy:..................................................................................................... 14
VIII. Search Extract: ................................................................................................... 14
IX. OECD BEPS and US Tax Reform Considerations: .................................... 16
X. Conclusion: .............................................................................................................. 18

*
Charles Edward Andrew Lincoln, IV, charlieealincolniv@gmail.com.

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I. Introduction:

Amazon is considered the preeminent online retailer in the world. It operates

in varying areas from robotics, movie databases, web services, audio books, food
markets, etc. Its expansive reach is a matter of e-commerce highly dependent on the
logos and Amazon trademarks, such as the Amazon smiling face, the Amazon logo,
etc.

II. Industry Analysis:

The E-commerce industry falls into the category of internet and software
services according to S&P’s Industry Surveys on “Internet Software & Services.1 E-
commerce can be categorized into two major segments on the internet: business-to-
consumer (B2C) and business-to-business (B2B).2 Amazon.com falls into the B2C
category, because Amazon’s main target is consumers.3
Amazon is the largest online retailer in the world. But it operates with a great
deal of competitors. Below is a chart of the main competitors Amazon deals with in
the economy.4

1
Scott Kessler & Jien Loon Choong, S&P 500 Internet Software & Services S&P Global CFRA (2017),
https://www-capitaliq-
com.ezproxy.bu.edu/CIQDotNet/Index/IndexWidgetTearsheet.aspx?companyId=2671631 (last visited
Apr 17, 2018). This was found using Boston University's Law Library online resources.
2
“E-commerce consists of the buying and selling of products, services and information via computer
networks, including the Net..56 E-commerce can be generally categorized into two broad groups: business-
to-consumer (B2C) sales, where retailers sell to individual customers, e.g., Chapters.ca, and business-to-
business (B2B) sales, where retailers sell to other businesses,57 e.g., e.g., Procuron is Canada's largest B2B
site, providing a marketplace of procurement services for business products/services. For the rest of the
paper, e-commerce will be used synonymously with B2C retailing on the Internet (e-retailing).” Jeanette
Teh, Privacy Wars in Cyberspace: An Examination of the Legal and Business Tensions in Information Privacy, 4
Yale Symp. L. & Tech. 1 (2002).
3
“B2C involves the selling of tangible and intangible items directly to consumers over the Internet. This is
where, for example, an individual buys books from the online retailer Amazon. B2B, on the other hand,
concerns inter-firm transactions.” Shiv Narayan, Goods and Services Tax on Privately-Imported Goods, 26
NZULR 470, 476 (2014).
4
This is a limited chart. Amazon is a Multinational e-Commerce site and thus has almost every industry in
the world competing with it. Google App Engine competes with Amazon Web Services.

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III. Category Example
1 Online mass retailers Ebay.com
Apple.com, Dell.com, Staples.com, Dunder
2 Online specialized retailers
Mifflin Paper Company*
Book retailers (this is the main
3 Barnes & Noble, Half Price Books, etc.
source of revenue for Amazon.com)
Wal-Mart, Sears (insofar as it still exists),
4 Brick and Mortar retailers
etc.

E-books (Kindle is a main revenue

Apple i-Pads, Barnes & Noble Cybook,
generator for Amazon through both
Rakuten Kobo eReaders Onyx Boox
5 its own sales and e-books
PocketBook, Sony e-readers, Open
downloaded included in hard copy
Publication Distribution System (OPDS)
purchases

6 Social Buying Sites Groupon, Deal Map

5

5
Amazon vs Wal-Mart, SlideShare (2011), https://www.slideshare.net/linda_perangin/amazon-vs-
walmart (last visited Apr 16, 2018).

Ikram Khan, Amazon [Supply Chain and Michael Porter Analysis Competitive Strategy] SlideShare (2015),
https://www.slideshare.net/IkramKhan17/amazon-54417575?from_action=save (last visited Apr 16,
2018).

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Amazon can also be viewed in light of Michael Porter’s Five Forces analysis in terms
of value drivers as well.6

6
Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors xvi (1980).
See. David J. Collis & Cynthia A. Montgomery, Corporate Strategy: A Resource-Based Approach 49-54
(1998).
7
Van Alstyne, Marshall W., Geoffrey G. Parker, and Sangeet Paul Choudary. "Pipelines, platforms, and the
new rules of strategy." Harvard Business Review 94, no. 4 (2016): 54-62. See also. Roberta
Greenspan, Amazon.com Inc. Five Forces Analysis & Recommendations (Porter’s Model)(2017),
http://panmore.com/amazon-com-inc-five-forces-analysis-recommendations-porters-model (last visited
Apr 19, 2018). Cf. "Strategic planning." Britannica Academic, Encyclopædia Britannica, 11 Nov. 2016.
academic-eb-com.ezproxy.bu.edu/levels/collegiate/article/strategic-planning/601044. Accessed 19 Apr.
2018.

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IV. Company Analysis:

Amazon operates in the global marketplace as a web-based retail company,

although it's recent merger with or acquisition of Whole Foods suggests it sees a
"brick-and-mortar" presence throughout the world as an integral part of its future in
addition to the online market.8 However, Amazon still "mostly" operates online and
sells products online. Some people regard Amazon as a frightening cross between
Hercules' nine-headed Hydra9 and Jules Verne's Giant Squid—a monstrous creature
which hunts in every direction and ultimately seeks to dominate the world—one
single corporate entity involved in, and ultimately controlling all aspects of the world
economy.10
Amazon operates as an internet retailer company. It operates online and sells
products online.
According to the 10k filing Amazon provided with the Securities and Exchange
Commission, Amazon engages in a large variety of products.11 It primarily operates
as an online retailer through its algorithms to predict what users want to buy and
the integrated search engine that enhances the user’s experience.12

8
N.Y. TIMES, https://www.nytimes.com/2017/08/23/technology/amazon-whole-foods-deal-clears-last-
two-major-hurdles.html (last visited Apr. 7, 2018).
9
"Hydra" 11 Encyclopaedia Britannica 33-24 (11th ed. 1910). “See Hesiod, Theog., 313; Euripides, Hercules
furens, 419; Pausanias ii. 37; Apollodorus ii. 5, 2; Diod. Sic. iv. II; Roscher's Lexikon der Mytlhologie. In the
article GREEK ART, fig. 20 represents the slaying of the Lernaean hydra by Heracles.”

1911 Encyclopædia Britannica/Hydra (mythology),

https://en.wikisource.org/w/index.php?title=1911_Encyclop%C3%A6dia_Britannica/Hydra_(mytholog
y)&oldid=6286837 (last visited Apr. 7, 2018).
10
Jules Vernes, TWENTY THOUSAND LEAGUES UNDER THE SEA (1870).
11
Amazon.com, Annual Report (Form 10-K)
https://www.sec.gov/Archives/edgar/data/1018724/000101872416000172/amzn-20151231x10k.htm
(accessed last on April 17, 2018). SEC.
12
“Despite these potentially game-changing technological developments, most of the literature on
commercial algorithms focuses on the use of algorithms by suppliers (such as Google, Uber, Amazon, and
Target).11 Much of this literature emphasizes the role of algorithms in collecting and analyzing information
about consumers' preferences, enabling firms to better compete for their attention and to create more
efficient and profitable marketing campaigns. Another stream of literature deals with the potential use of
algorithms to more easily facilitate collusion or oligopolistic coordination among suppliers. Interest in
consumers is mainly restricted to their role as a resource for information (“consumers as products”) and as
a target for marketing campaigns. The sparse literature on the use of algorithms by consumers has treated
them as tools to help consumers compare price and quality, predict price and market trends, make
expedient decisions under uncertain conditions, make better-informed choices, and strengthen competitive
pressure overall.15 This literature disregards the possibility that at a certain point consumer deference to
algorithms may result in those algorithms bypassing consumer input altogether.” Michal S. Gal, Niva Elkin-
Koren, Algorithmic Consumers, 30 Harv. J.L. & Tech. 309, 312 (2017). See also. “For the seminal article, see
Ariel Ezrachi & Maurice E. Stucke, Artificial Intelligence & Collusion: When Computers Inhibit
Competition (Univ. of Oxford Ctr. for Competition Law & Policy, Working Paper No. CCLP(L)40, Univ. of
Tenn. College of Law, Research Paper 267, May 2015). See also Ariel Ezrachi & Maurice E. Stucke, Virtual
Competition: The Promise and Perils of the Algorithm-Driven Economy 11-21 (2016).” Michal S. Gal, Niva
Elkin-Koren, Algorithmic Consumers, 30 Harv. J.L. & Tech. 309, 353 (2017).

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 Amazon also has a whole host of subsidiaries engaged in activities as different
as audio books to robotics to movie databases to levels of artificial intelligence:
“A9.com, AbeBooks, Alexa, Internet, Amazon Books, Amazon Game Studios, Amazon
Lab126, Amazon Publishing, Amazon Robotics, Amazon Studios, Amazon Web
Services, Audible Inc., Body Labs Book Depository, Box Office Mojo, Digital
Photography Review, Goodreads, Graphiq, Internet Movie Database, Ring, Souq.com,
Twitch.tv, Whole Foods Market, [and] Woot Zappos.”13
Amazon has many manufacturing intangibles – patent licensing agreements,
but it’s also going to cover know how. It also includes marketing intangibles – trade
markets, but also trade names and copy rights and marketing of the company.
Amazon in Seattle, Washington, USA is the parent company. It runs the main
operations of the eCommerce business.
The Amazon website is the portal through which all business is done. “Amazon
used the technology that powered its own websites to build and operate eCommerce
websites for other merchants. Amazon's principal M.com clients were large retailers
operating in the United States and abroad. There were no material differences
between the technology "packages" that domestic and foreign clients received.”14

13
Amazon (company),
https://en.wikipedia.org/w/index.php?title=Amazon_(company)&oldid=836280955 (last visited Apr. 15,
2018). This source was only used to get a list of some of the major Amazon subsidiaries.
Amazon.com, Inc. v. Comm'r, 2017 U.S. Tax Ct. LEXIS 9, *94, 148 T.C. No. 8.
14

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15

IV.I.1 Value Chain Analysis:

15
Jeff Desjardins, INFOGRAPHIC: Amazon's biggest acquisitions (2017),
http://www.businessinsider.com/amazon-stock-price-biggest-acquisitions-infographic-2017-9 (last
visited Apr 19, 2018). See also. Another incomplete list of mergers and acquisitions by Amazon: Bill Slawski
(July 28, 2009). "Amazon Acquisitions and Investments". seobythesea.com. Retrieved February 14, 2014.

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16

IV.I.2 Explanation of Value Chain analysis:17

16
“[Clayton] Christensen's original work was framed in terms of Michael Porter's “value chain” theory.69
Porter's value chain theory was developed in the context of manufacturing and distribution businesses. In
these sorts of settings, a business adds value to inputs. The added value can come in the form of a factory,
bringing raw materials in one door and shipping out finished product through another. In his more recent
work, Christensen looks at other kinds of “value configurations.”” Ray Worthy Campbell, Rethinking
Regulation and Innovation in the U.S. Legal Services Market, 9 N.Y.U. J.L. & Bus. 1, 21 (2012). See. Michael
Porter, Competitive Advantage: Creating and Sustaining Superior Performance 33-34 (1985).
Cf. George S. Geis, The Space Between Markets and Hierarchies, 95 Va. L. Rev. 99, 153 (2009).
17

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 There are two big drivers in Amazon which are: the products sold on the online
platform, and the algorithms used for more effective advertising to indicate what
Amazon customers would most likely want.
The advertising in which people will pay them to be a hierarchical, much
higher, much more visible. So at the same time that they're driving advertisers,
they're also packaging and selling what they refer to as metadata. That data analytics
is worth a fortune to Amazon, whether it be predictive analytics to determine when
you click on a dog food, which one you're most likely to pick. These suggestions are
based off your former clicks.18
Just as a caveat to the hierarchies, so the hierarchies are present, but they're
only person if they are contingent upon the clicks that a user makes. So a user is not
going to be advertised dog food if all you've looked up is clothing or something like
that. That's just a caveat.
Just incidentally, I read this book by one of the former heads and founders of
Google—How Google Works.19 They have a really—I wouldn't call it a cult, but they
have a really interesting method of work in “Silicon Valley” type of businesses. Your
first day you wear a special hat, you're considered part of the team. They have this
intensive interview processes. And once you get in, you're really part of the team, and
they really want to integrate you, and you're happy to be working at Amazon or a
similar “Silicon Valley” type industry. You're not just working a 9 to 5, you're willing
to stay longer.
Because a lot of these support activities I noticed are usually the same,
accounting, legal, R and D, depending on the type of company, but I just thought that
that pride that Amazon employees have was something unique to them.
Amazon also fosters this through their intensive hiring practices that focus on 12
leadership principles.20

V. Intercompany Transaction:

18
This procedure was already in practice since the 1990s whereby Amazon could use algorithms based off
former clicks to predict what customers would want. Jeff Bezos explained this even on a 60 Minutes
documentary in 1999: https://www.youtube.com/watch?v=SWUIxqWPktQ
See Eric Schmidt & Jonathan Rosenberg, How Google Works 69 (2014).
19

See https://www.amazon.jobs/principles. The principles are widely used in Amazon from the interview
20

process and used daily in conversations at the office.

Amazon has even provided Congressional testimony to this effect:

“At Amazon, we're guided by our Leadership Principles. They're ingrained in our work - we use them
when we're talking through a new project, interviewing a prospective hire, or solving a customer's problem.
What we've found in our years of hiring veterans and military spouses is that many of our Leadership
Principles closely align with what makes people successful in the military.”

Veterans in Tech: Innovative Careers for All Generations of Veterans, Congressional Hearings (1824-
current), May 17, 2016.

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 The transaction dealt with in this transfer pricing analysis is a transition of a
marketing intangible from the US to Ireland. This marketing intangible is a licensee
in Ireland. Legally, this is not for transfer. It’s a full risk licensee of Amazon. The
license is perpetual. The licensee in Ireland has the right of use.
In the Amazon U.S. Tax Court, “[i]n a series of transactions in 2005 and 2006
Amazon US transferred to AEHT three groups of intangible assets: (1) the software
and other technology required to operate petitioner's European websites, fulfillment
centers, and related business activities; (2) marketing intangibles, including
trademarks, tradenames, and domain names relevant to the European business; and
(3) customer lists and other information relating to petitioner's European clientele.”21

V.I.1 Functions, Assets, Risks (FAR) Analysis within the Comparable

Profits Margin Analysis22

21
Amazon.com, Inc. v. Comm'r, 2017 U.S. Tax Ct. LEXIS 9, *3, 148 T.C. No. 8.
22
Treas. Reg. § 1.482-5(a).

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 A functions, assets, risks (FAR) analysis is key in a transfer pricing analysis.23
The FAR is vital to find and document the economic activities performed by an
enterprise.24 The price charged—that is the transferred price—in any transaction
should reflect the functions performed by accounting for the risks assumed and the
assets used.25

26

Much of the development of the trademark was developed in the United States
and maintained through the US market. However, it is fair to assume that there has
been some additions and value added from the trademark marketing intangible
existing in Ireland. That means some of the functions in Ireland were done in Ireland.
Ireland also does the accounting, HR, management, and coordination of
delivery results.

V.I.2 Functions, Assets, Risks (FAR) Analysis within the Comparable

Profits Margin Analysis Application

Functions US Parent Co. Irish Subsidiary

23
“The examination of issues of ownership and entitlement to intangible related returns (IRR), requires
consideration of contractual arrangements, functions, assets and risks, and compensation for outsourced
functions. When the functions, assets and risks coincide with a contract, IRR is assigned to the contractual
owner. Otherwise, the functions assets and risks controls the allocation of IRR.” Future OECD intangibles
draft to better address transfer pricing of intangibles where financial investment is separated from
functions/control, official says, 06/11/2013 Int'l Taxes Weekly Art. 8.
24
”(T)he tested party will be the participant in the controlled transaction whose operating profit
attributable...can be verified using the most reliable data and requiring the fewest and most reliable
adjustments, and for which reliable data regarding uncontrolled comparables can be located.” § 1.482-
5(b)(2). This means that usually the tested party is the least complex entity. See. Robert Ackerman and
Elizabeth Chorvat, Modern Financial Theory and Transfer Pricing, 10 Geo. Mason L. Rev. 637, 673 fn. 49 (2002).
“[A] functional analysis of the portions of *1348 the MNE in each jurisdiction should be made, and returns
25

should be allocated to each function (and not just to the tested party, as under the CPM) on the basis of the
profits earned by parties performing the same functions in arm's-length transactions.” Reuven S. Avi-
Yonah, The Structure of International Taxation: A Proposal for Simplification, 74 Tex. L. Rev. 1301, 1347–48
(1996).
26
“Under the CPM, functions performed by the tested party49 are analyzed and the profit levels of the
tested party are compared to the profit levels of parties performing comparable functions.” Robert
Ackerman and Elizabeth Chorvat, Modern Financial Theory and Transfer Pricing, 10 Geo. Mason L. Rev. 637,
646 (2002).

11

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 Supply Management Yes No
Management Services Yes No
Pricing
Marketing No Yes
Order Fulfillment No Yes

Risks Us Parent Co. Irish Subsidiary

Inventory Risk No Yes

Intangibles (Assets) US Parent Co. Irish Subsidiary

Trademark, Licenses, No Yes
Trade Name

VI. Best Method and Why:

The Comparable Profits Method ("CPM") was selected as the best method
based on the availability of reliable data and because comparable uncontrolled
transactions with which to apply the transactional methods could not be identified
reliably.

VI.I.1 Search Strategy:

The Regulations suggest guidance and provide for a general methodology to

analyze arm’s length prices for transfer pricing between related parties. The
Regulations also provide specific methods to be applied depending on facts and
circumstances of a transaction.
"Transactional" methods include those methods in which a transaction is
directly compared to another transaction. "Profit" methods include those methods in
which a transfer price is determined indirectly by comparing the margin a related-
party transaction generates to the margins earned by independent businesses
engaging in similar transactions, performing comparable functions and assuming
comparable risks.
Following the best method rule, the arm's length result of a controlled
transaction must be determined under the method that, under the facts and
circumstances, provides the most reliable measure of the arm's length result. The
Regulations provide guidance for determining which method among the several may
provide the most reliable measure in a given situation; they further allow that an
arm's length result may be determined by any method without establishing the
inapplicability of another method, provided that if two or more methods render
inconsistent results, the results of the more reliable method be used. In general, the
reliability of any particular method depends upon the degree of comparability
between the controlled transaction (or the controlled taxpayer) and any uncontrolled
comparables, and the quality of the data and the assumptions used in making the

12

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comparison; it is presumed, however, that data based on the results of transactions
between unrelated parties provide the most objective basis for determining whether
the results of a controlled transaction are arm's length.

For tangible property transactions, specified methods include:

• Comparable uncontrolled price (“CUP”) method;
• Resale price (“RP”) method;
• Cost plus (“CP”) method;
• Profit split (“SP”) method; and,
• Comparable profits methods (“CPM”).

For intangible property transactions, specific methods include:

• Comparable uncontrolled transaction (“CUT”) method;
• PS method; and,
• CPM.
For services transactions, specific methods include:
• Services cost method (“SCM”);
• Comparable uncontrolled services price (“CUSP”) method;
• Gross services margin method (“GSMM”);
• Cost of services plus (“CSP”) method; and
• PS method.

According to the Regulations, transfer pricing specialists may also elect to use
customized “unspecified methods.” Those methods must be proven that the
unspecified method produces the most reliable measure of the arm’s length result. An
unspecified method must take into account the general principle that uncontrolled
taxpayers evaluate the terms of a transaction by considering the realistic alternatives
to that transaction, and only enter into a particular transaction if none of the
alternatives is preferable to it.

The Treasury Regulations indicate that a preferred method for intangibles is

the comparable uncontrolled transactions method (CPM method).27
The databased used was Bureau Van Dijk (BvD). The final interquartile range
led to a CPM, not a CUT, because there is a transfer of royalties to license of franchise
of the online retailer concept.28 CUT is primarily used in the ktMINE database for
intangibles.

Treas.Reg. 1.482-5. http://www.un.org/esa/ffd/tax/2011_TP/TP_Chapter5_Methods.pdf

27

28
“The comparable profits method (CPM) of transfer pricing uses ratio analysis.8 The regulations refer to
three ratio methods in particular: the return on capital employed, the return on sales, and the ratio of gross
profit to operating expenses. The taxpayer has considerable discretion in selecting from these three
alternatives or from other ratios in applying the comparable profits method. The regulations do not intend
that the comparable profits method would necessarily be the best method, but all too often taxpayers
abandon the conventional methods to select the CPM. This choice of method is subject to further scrutiny
by the IRS.” Robert Feinschreiber, Determining the Pricing for Intercompany Sales, Fla. B.J., NOVEMBER 1996,
at 73, 75

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 The process premediated and used for the analysis of the transactions involved
acquiring the royalty rates and using them effectively and efficiently to reach a
median in accordance with the Treasury Regulation on Section 482.

VII. Search Strategy:

The best search strategy was done using Bureau Van Dijk (BvD).29 This report
used the TP Catalyst function of BvD.
This report’s study first used other unspecified method, but with a preference
for the CPM method. The selection criteria for potential criteria used was “limit to
publicly listed companies,” “all countries” (so as to not have a geographic limitation),
the SIC code 5961 that Amazon uses, an exclusion of SIC Code 5045.30 This report’s
study also excluded companies with no activity description in the text.
Then I reviewed each company and each transaction to make sure that the
functions, risks, and assets fit into the same description as Amazon’s controlled
transaction of franchising its trademark in Europe in terms of being a franchise and
a transfer of trademark in the franchise agreement. I focused on making sure that
the companies were online retailers of some sort. The companies kept on the report
were either online retailers or e-commerce providers of some sort—and often in
specific markets.

The initial search strategy was utilized using ktMINE—which has been
validated as a useful database in the US Tax Court case in the Amazon case.31
With the ktMINE operation in mind, this transfer pricing analysis found the
SIC code provided by Amazon through the NASDAQ Composite website for 5961.32
Furthermore, I limited the search for “marketing intangibles,” “trademark,”
“trademarks,” and “Tradenames.”
This report did not use geographic limitations, because the codes were limited
to begin with, but it should be noted that most transaction agreements went through
Ireland to begin. Thus, perhaps, a geographic limitation in the Irish or European
region would not have changed the results dramatically.

VIII. Search Extract:

29
“Bureau van Dijk (BvD). Publishes an array of information databases containing company summaries,
analyst reports, company financial information, and industry and market research. These databases are
available online or via DVD-ROM discs. BvD’s databases cater to various regions or categories, and include
TP Catalyst, Amadeus, Orbis, Oriana, and other offerings. Brief descriptions of the major BvD databases
are provided below:○TP Catalyst is a software and data platform that interfaces with BvD databases to
provide access to over 25 million companies with recent financial accounts. TP Catalyst is updated monthly
and all historical versions of TP Catalyst and the underlying information remain available on BvD servers.
TP Catalyst follows a methodology consistent with Transfer Pricing profit-based and transaction-based
approaches described in the OECD Guidelines and U.S. Regulations.” 1-4 Practical Guide: U.S. Transfer
Pricing § 4.05 (3rd 2017)
This report found that the sector limitation was not as accurate as a SIC Code classification.
30

31

32
https://www.nasdaq.com/symbol/amzn/stock-report (NASDAQ)

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The initial baseline presented was:

Profit level indicator and asset-intensity adjustments

PLI Return on sales (Operating margin TP) (%)

selected :

No Working Capital adjustments have been made in this analysis

Statistical adjustment (Interquartile range) : Average Method

Average annual interest rate:

2016 2015 2014 Average

Default rates
2.5 2.6 2.9 2.7
OECD

Return on Sales (Operating TP) % Results:

This chart represents the maximum, upper quartile, median, lower quartile,
minimum, and standard deviation. Usually, a number in the upper quartile to the
lower quartile is recommended.
This is a representation of the distribution chart before adjustments (there are
no adjustments in this report).

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 33

The return on sale (Operating Margin TP) (%) through 17 comparable

companies should be at the media of a weighted average of 3.43%.

IX. OECD BEPS and US Tax Reform Considerations:

OECD BEPS has been a project to reduce base erosion and profit shifting that
multinationals use.34
Regarding risk, the OECD BEPS Action Plan 9 seems to purport that
contractual allocations of risk should still be examined. But the really if a company
lacks the functionality, but has the capital to bear risks, the risks and
remuneration—according to the OECD—should be allocated to the related party that
does have the functionality. Functionality is the key factor and contractual allocation
may be followed only if the contract allocates the risks to where the OECD wants the
risks to be allocated.
The OECD seems to be saying that they are still interested in looking at
contracts when understanding businesses, but really the OECD is not looking at
contracts in the risk analysis.

33
This is received and generated from the TP Catalyst database.
34
See. For an example of differences in United Nations and OECD “[t]he pre-2010 OECD provides that
notional payments should in some scenarios not be deducted. But in some scenarios they can be
deducted. Article 7 of the 2008 OECD Commentary follows an approach of allowing deductions for some
items of income and not for others.” Charles Lincoln, The Myth of "Separate Enterprises" in International
Taxation: Approaches to Attribution of Profits to Permanent Establishments, 22 Trinity L. Rev. 30, 33 (2017).

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 Per U.S. Tax Reform,35 there is now export incentive, because foreign derived
intangible income (FDII). Although the FDII may not survive WTO.36 It could include
reciprocal measures from the WTO as well. It might incentivize bringing IP back to
the U.S. through anti-deferral and global intangible low-taxed income (GILTI). The
new anti-base erosion rule is called the Base Erosion Anti-abuse Tax (BEAT). The
limitations on income shifting through IP transfers.37 The new definition of intangible
property (IP) includes aggregation, and codification of options realistically available.
Moreover, now there is the US Tax Rate Currently 21% (but this should take into
account state tax rates as well).38
Here, the FDII income will qualify for the royalty and the licensing agreement
in Ireland. Regarding BEPS, the structure will likely not be challenged because the
licensing arrangement is not aggressive. The BEPS challenges at most would be
raising profits in Ireland.39 Incoming royalties from foreign party franchise will get

The source for limiting state taxation in the United States Constitution comes from the Commerce
35

Clause as an affirmative command to Congress "No regulate Commerce with foreign Nations, and among
the several States, and with the Indian Tribes." But in addition to this affirmative command, there is a
negative command "[the Supreme Court] has consistently held this language to contain a [] negative
command, prohibiting certain state taxation even when Congress has failed to legislate on the subject."
Charles Edward Andrew Lincoln, IV (Charles Lincoln), A New Deal For Europe? The Commerce Clause As
The Solution To Tax Discrimination And Double Taxation In The European Union, 11 J. Bus. Entrepreneurship
& L. 115, 122-123 (2018). Cf. Charles Edward Andrew Lincoln IV, Hegelian Dialectical Analysis Of U.S.
Voting Laws, 42 Dayton L. Rev. 87, 88 (2017).
“However, the United States has spent years trying to develop anti-abuse rules for corporate inversions
36

while corporations have continued to find ways around these rules.” Charles Lincoln, Is Incorporation
Really Better Than Central Management and Control for Testing Corporate Residency? An Answer to Corporate
Tax Evasion and Inversion, 43 Ohio N.U.L. Rev. 359, 370 (2017).
For further information regarding integration of U.S. case law and international tax law within the
37

confluence of tax and history of taxation within the common law scheme see: Charles Edward Andrew
Lincoln IV (Charles Lincoln), A Structural Etiology of the U.S. Constitution, 43 J. Legis. 122, 131 (2016). See.
United States IRS v. Osborne (In re Osborne), 76 F.3d 306, 309 (9th Cir. 1996).
Charles Lincoln, Is Incorporation Really Better Than Central Management and Control for Testing Corporate
38

Residency? An Answer to Corporate Tax Evasion and Inversion, 43 Ohio N.U.L. Rev. 359, 370 (2017).
Id.
39

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 the FDII effective rate of 13.125%. This would not be an actual change in the tax rate,
but a deduction.

X. Conclusion:

The recommendation of this report is to target the median. This report is only
providing the arm’s length results in the interquartile range.
This is between the 25th to 75th percentile. There could be marketing
arguments for any number within that range. The return on sale (Operating Margin
TP) (%) through 17 comparable companies should be at the media of a weighted
average of 3.43%.
If there is an adjustment by the IRS, then the IRS will adjust the price to the
median.

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