The referenced TEI comments provide an excellent understanding into the challenges and complexity of Cost Contribution Arrangements (CCAs). http://tei.org/Documents/TEI%20Comments%20BEPS%20Action%208%20-%20CCAs%20-%20FINAL%20to%20OECD%2028%20May%202015.pdf\ Key observations:
- The Discussion Draft comments deviate from the current accepted methodology of sharing costs (apart from contributions of pre-existing intangibles at fair value) into an assessment of value in order to be consistent with the arm’s length principle.
- A CCAs risk arrangement is much different than other contractual arrangements, for which comparability is illusory.
- The Draft provides that low value-added series should be valued at cost for practical reasons, whereas BEPS Action 10 prescribes an election to value such services at a markup of 2-5%. These approaches should be aligned.
- If contributions are measured at value vs. cost, clarity of withholding tax application would be welcome.
- The condition of required balancing payments should be removed as it is not a feature of arm’s-length adjustments.
- Qualifications for a CSA participant should be clarified, as the Draft precludes a participant unless it has “the capability to make decisions to take on the risk-bearing opportunity, to make decisions on how to respond the the risks, and to assess, monitor, and direct any outsourced measures affecting risk outcomes under the CCA.”
- Funding the research and development in a CCA should receive increased emphasis.
- Complex and extreme examples should be accompanied by practical and easy examples to implement CCAs.
TEI’s comments introduce well written rationales for suggested changes to the Draft, resulting in a win-win opportunity for taxpayers and tax authorities. CCAs seem to be difficult to comprehend in various tax jurisdictions, thus the practicality to be introduced would significantly reduce misconceptions / assumptions for the use, and benefits, of a CCA.