On 29 April 2015 the OECD released a discussion draft on cost contribution arrangements. The draft is part of action 8 of the OECD/G20 action plan on base erosion and profit shifting (BEPS) aiming to ensure that transfer pricing outcomes are in line with value creation. Rules are being developed to prevent base erosion and profit shifting by moving intangible assets around a group. The discussion draft proposes text for an updated Chapter VIII of the OECD transfer pricing guidelines on cost contribution arrangements.
A cost contribution arrangement (CCA) can be used for the joint development, enhancement, maintenance protection or exploitation of intangible assets. The guidance clarifies that contributions must be measured at value rather than at cost. This helps to ensure that the outcomes for the participants in the CCA are not significantly different from the outcome from the transfer or development of an intangible outside a CCA.
The guidance on CCAs takes into account the guidance on risk in chapter I of the OECD guidelines. A CCA depends on the bearing of risks by all participants. The concept of control of risk is therefore important for determining the participants in the CCA. The guidance also aims to align the guidance on CCAs with the issues addressed in the guidance on the transfer pricing aspects of intangibles released by the OECD in September 2014.
Section C2 of the revised chapter VIII emphasizes that the general principles on the allocation of risks when delineating transactions apply to CCAs. All the participants in a CCA share the contributions and also the risks of the CCA activities, so a participant in the CCA must have the capability and authority to control the risks associated with the CCA. In particular it should be able to take decisions on the risk-bearing opportunities presented by the CCA and decide how to respond to the risks. It should also be able to assess, monitor and direct any outsourced measures affecting the risk outcomes of the CCA.
The revised Chapter VIII notes that there will be some circumstances in which the value of a participant’s contribution to a CCA will be valued at cost, either because the value (arm’s length price) of services contributed corresponds to the costs of the services or because the difference between value and costs is small, for example in the case of low value added services. In all other cases however the costs are unlikely to be a reliable basis for establishing the value of the contributions by participants in the CCA and would lead to results that are not at arm’s length.
An Annex to the revised Chapter VIII includes examples illustrating the guidance given on CCAs, showing that contributions should be assessed at value, based on arm’s length prices, rather than cost. Examples also show the role of the functional analysis and the analysis of risk in determining if a company is a participant in the CCA.
Comments on the discussion draft are invited by 29 May 2015. A public consultation on the CCA discussion draft and other topics will be held by the OECD on 6 and 7 July 2015.