20. WebCo is a member of an MNE group that develops IT solutions for business customers. Recently, WebCo designed the architecture of a web crawler to collect pricing data from internet sites. WebCo has written the code of the program so it is able to systematically scan web pages in a more efficient and faster way than any other similar search engines available in the market.
21. At this stage, WebCo licenses the program to ScaleCo, a company in the same MNE group. ScaleCo is responsible for scaling-up the web crawler and for deciding the crawling strategy. ScaleCo is a specialist in designing add-ons for the web crawler and in customising the product to address gaps in the market. Without these contributions, the system would not be able to meet potential customers’ needs.
22. Under the terms of the licence, WebCo will continue developing the underlying base technology and ScaleCo will use these developments to scale up the web crawler.
23. The functional analysis concludes that the economically significant risk in relation to the transaction is the development risk, i.e. the risk that the web crawler being developed is unsuccessful.. In accordance with the risk analysis framework described in Section D.1.2.1 of Chapter I of these Guidelines, it is determined that WebCo and ScaleCo assume the development risk of the software.
24. The accurate delineation of the transaction indicates that WebCo’s and ScaleCo’s contributions are unique and valuable to the creation and potential success of the web crawler.
25. Under these circumstances, the transactional profit split method is likely to be the most appropriate method for determining the arm’s length compensation for the licence between WebCo and ScaleCo.