As I’m sure you know, Benjamin Franklin (1706 – 1790) was one of the Founding Fathers of the United States of America, one of the draftsmen of and signatories to the Declaration of Independence, as well as being a diplomat, scientist and inventor. He was not born into wealth – he was the 15th child of a man who made soap and candles – and yet he made enough money to retire from active business by the age of 42.
How did he do that, and what does it have to do with transfer pricing?
The answer is two kinds of profit splits involving the printing business. (Franklin didn’t make money directly from his inventions – he didn’t patent any of his scientific discoveries, since he believed that everyone should be able to freely benefit from scientific progress.)
The first kind of profit split involved the investor providing the capital, and Franklin providing the labour and skill, for a printing business. Profits were split 50/50. The second kind was a type of franchise arrangement which he entered into with local ‘freelance’ printers (called ‘journeymen’), including his former apprentices. He gave them the equipment and materials they needed to set themselves up as a printer in another city. In return, they paid him one third of their profits for the next six years.
You may be wondering what relevance this has to transfer pricing. That’s a fair question.
Well, I’ve come across a number of transfer pricing commentators who seem to think that profit split arrangements (and limited risk structures) don’t exist in real life, and are merely artificial constructs. That’s just wrong – there are examples in every walk of commercial life. I’ve personally advised on countless of these kinds of arrangement between unconnected third parties – including franchises, distribution networks, agency arrangements, JVs and limited recourse financing arrangements.
In a transfer pricing context, part of the challenge is to articulate those arrangements in a way which makes business sense to all the parties (group entities) involved. This means creating appropriate intercompany agreements which are succinct and which work from a commercial perpective as well as a transfer pricing perspective.
I would highly recommend reading Benjamin Franklin’s autobiography – also succinct, but full of fascinating philosophical insights.
N.B. The LCN Legal team is looking forward to attending and speaking at TP Minds Asia which is taking place in Singapore next month. Please come to our stand and say hello if you’re going to be there.