On 29 April 2015, the OECD issued a Discussion Draft on the transfer pricing aspects of cost contribution arrangements (‘CCAs’) under Action 8 of the BEPS action plan. The Draft proposes fundamental modifications to Chapter VIII of the OECD Transfer Pricing Guidelines:
With respect to measuring the value of contributions to CCAs and the tax classification of contributions, balancing payments and buy-in/buy-out payments; and
To make it consistent with other BEPS amendments, including those addressing the fundamental issues on risks, capital, reclassification and intangibles.
The guidance suggested by the OECD includes, in line with the changes suggested to Chapters I and VI as part of the work on risks and intangibles, the incorporation of a new requirement in determining who can be a participant in a CCA, by proposing that the participants in a CCA must have the capability and authority to control the risks associated with the ‘risk-bearing opportunity‘ under the CCA. That is a fundamental change from the prior guidance on CCAs, although consistent with the overall theme of the BEPS project of increased focus on ‘substance’ and aligning taxation with the employees’ location.
Furthermore, the report also stresses that all of the important R&D and other development activities contributed by the participants to a CCA would need to be accounted for at arm’s length prices rather than at cost under the existing Guidelines. CCAs could become a misnomer in the future, as arrangements designed to allow participants simply to share the costs of intangible development would no longer be included in this paradigm.
The primary goal is to ensure that contributions are commensurate with the benefits received under a CCA. This is a difficult task when the contributions are complex and cannot be valued at cost. The guidance suggested by the OECD, although it acknowledges the need to achieve simplifications, may nevertheless increase complexity and disputes.
The ultimate guidance on CCAs will eventually depend on the final wording of the discussions on risks, capital, reclassification and intangibles. In particular, a discussion draft on risk, non-recognition and intangibles is expected by the end of May 2015. Depending on the wording of this document, the CCA report may need to be amended accordingly.
More information with respect to the Discussion Draft on Action 8 can be found here.