The OECD published the final report on revised guidance to apply the transactional profit split method, as part of BEPS Action 10. This guidance provides the final text, based on comments received.
Additionally, OECD published final guidance for tax administrations for determining the proper approach to apply for hard-to-value intangibles. This text is included as an annex to Chapter VI of the Transfer Pricing Guidelines. This approach should promote consistency and, hopefully, minimize double taxation.
The text of these reports are provided for reference, as they are a must read for transfer pricing professionals.
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.
The OECD has released its Discussion Draft addressing BEPS Action 8: TP Guideline revisions on Cost Contribution Arrangements (CCAs). Comments should be submitted by 29 May 2015.
A link to the Discussion Draft is provided for reference:
- Updated TP Guidelines text for Chapter VIII
- Draft guidance on Chapter I of the TP Guidelines released for public comments on 19 Dec. 2014 is taken into account
- There is always an expected benefit that each participant seeks from its contribution
- CCAs are to operate in accordance with the arm’s length principle
- Two types of CCAs: Development (i.e. ongoing future benefits) and Services (i.e current benefits)
- CCAs differ from intercompany transfer of property/services due to the expected mutual and proportionate benefit from pooling of resources and skills
- Illustrative examples are provided at the end of the Discussion Draft for further reference
- Application of arm’s length principle to CCAs:
- All parties have a reasonable expectation of benefit
- Calculate value of each participant’s relative contribution to the joint activity
- Determine whether allocation of CCA contributions accords with their respective share of expected benefits
As CCAs are becoming more common by MNEs, with additional complexity in valuation and comprehension by tax administrations, this Discussion Draft will form long-term guidance for the new TP Guidelines. Accordingly, it should be reviewed, with comments provided accordingly, by all interested parties.