4 Key Rules Every Cost Contribution Arrangement Should Follow to be Defensible
Borys Ulanenko
A Cost Contribution Arrangement (CCA) is one of the common
frameworks for MNEs to develop and exploit intangibles and services. The
transfer pricing of CCAs is a complex topic that attracts considerable public
attention. Both the OECD Guidelines and the UN Manual have separate chapters
dedicated to CCAs. Also, some tax authorities have developed detailed guidance
and regulations on CCAs that provide useful insight into their approach.
The idea of a CCA in international tax is broadly similar to a Cost-Sharing
Arrangement (CSA) in the US. The major difference between two is that a CSA may
be arranged only for joint IP development, whereas a CCA may be organised for
joint IP development as well as service arrangements. In this chapter, we will
focus on CCAs (not CSAs). Diagrams below illustrate development and services CCA models:
There are several key rules that every CCA should follow to be defensible from transfer pricing and tax perspective:
A participant in a CCA should
have the reasonable expectation that he will benefit from the objectives
of the CCA activity itself (and not just from performing
part or all of the activity within the CCA). Thus, for example, where a CCA
is established with the objective of developing an intangible, a party that
carries out research activities but is not assigned an interest in the
intangible, will not be a participant within the CCA.
A participant’s proportionate share
of contributions to the CCA should be consistent with the proportionate share
of expected benefits that the participant reasonably expects to receive.
A
CCA should have necessary balancing payments, buy-in and buy-out mechanisms in
place.
CCA
documentation should be VERY strong. OECD Guidelines para. 8.52 provide the
list of necessary information every taxpayer should maintain to defend his CCA,
but you should also check your local recommendations and regulations (if they
exist).
What are
other CCA elements that are critically important from your perspective? Let us know,
and we will add them to the list! In our
textbook, we dedicate a detailed chapter for the discussion about CCAs, including
8 practical examples and cases that explain services and development CCAs.
For more details about the textbook and the course, contact us:
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What is CbCR?
Country-by-Country Reporting (CbCR) is part of mandatory tax reporting for large multinationals. MNEs with combined revenue of 750 million euros (or more) have to provide an annual return called the CbC report, which breaks down key elements of the financial statements by jurisdiction. A CbC report provides local tax authorities visibility to revenue, income, tax paid and accrued, employment, capital, retained earnings, tangible assets and activities. CbCR was implemented in 2016 globally.
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