Thursday, 23 August 2012

EU Joint Transfer Pricing Forum Report on Cost Contribution Arrangements

The European Union Joint Transfer Pricing Forum (“EU JTPF”) released the final version of its Report on Cost Contribution Arrangements on Services Not Creating Intangible Property (“June Report”) on June 7, 2012. The June Report evaluates a potential common approach to Cost Contribution Arrangements (“CCAs”) within the EU, including with respect to: (i) identification of CCAs on services not creating intellectual property (“IP”), (ii) the need for each participant to that arrangement to have a reasonable expectation of benefit, and (iii) practical issues. The chart below, taken directly from the June Report, helps to summarize the differences between CCAs (on services not creating IP) and Intra-group services.

CCAs on Services not Creating IP vs. Intra-group Services

Furthermore, the June Report lays out 10 characteristics that a CCA must have in order to be consistent with the arm’s length principle:

  1. The arrangement should make business sense.
  2. The economic substance should be consistent with the terms of the CCA.
  3. The terms of a CCA should be generally agreed upon prior to the beginning of the activity.
  4. The terms of a CCA should be at arm’s length, taking into account the circumstances known or reasonably foreseeable at the time of entry into the arrangement.
  5. Each participant should have a reasonable expectation of benefit.
  6. The participant’s share of the costs should be consistent with its share of the expected benefits.
  7. Reasonable expected benefits can be assessed in terms of efficiency or effectiveness in quantitative or qualitative terms.
  8. Contributions by a participant can be in cash or in-kind and therefore active participation is not a requirement.
  9. When a service subject to a CCA is also provided to or received from non-participants in the CCA it has to be valued at arm’s length.
  10. If participants join or leave the CCA, shares should be adjusted / rebalanced in accordance with the arm’s length principle.
The June Report emphasizes the importance of having a CCA agreement in place from the start that includes (i) general information about the CCA (e.g., business rationale, list of participants and responsibilities, budget, etc.), (ii) expected benefit from the CCA, (iii) contribution to the CCA, (iv) monitoring / adjusting the CCA, and (v) relationship to other entities (i.e., a list of other members of the Group or independent enterprises who benefit from services included in the CCA). The takeaway is that the agreement must provide a clear understanding of how the taxpayer’s CCA works in practice.
Finally, the June Report discusses some specific issues that require additional guidance, including (i) the expected benefit test, (ii) the contributions of each participant, (iii) anticipated benefit versus actual benefit, (iv) participation in a CCA, (v) joining / leaving a CCA, (vi) documentation, and (vii) post-review considerations. The EU JTPF believes that following the recommendations in this report will facilitate evaluation and acceptance from taxing authorities of CCAs.

More information on the EU JTPF's CCA report is available at EU website.