Tag: Cost contribution arrangement (CCA)

A CCA is a framework agreed among enterprises to share the costs and risks of developing, producing, or obtaining assets, services, or rights, and to determine the nature and extent of the interests of each participant in the results of the activity of developing, producing, or obtaining those assets, services, or rights. Se also CSA.

Spain vs EPSON IBÉRICA S.A.U., March 2021, Supreme Court, Case No 390:2021

Spain vs EPSON IBÉRICA S.A.U., March 2021, Supreme Court, Case No 390:2021

The SEIKO EPSON CORPORATION is a multinational group of Japanese origin active in among others areas, production and sale of computer products. The group is present in Spain, EPSON IBÉRICA, but has its European HQ in the Netherlands, EPSON EUROPE BV. The main shareholder and sole director of EPSON IBÉRICA S.A.U. was initially Mr. Jose Augusto. However, following a capital increase on 24 April 1986, EPSON IBÉRICA SAU became the subsidiary of the EPSON Group in Spain and Mr. Jose Augusto became a member of its Board of Directors. Mr. Jose Augusto held positions in both EPSON IBERICA and the Dutch parent company EPSON EUROPA until he left on 31 August 2007. As part of his emoluments, EPSON IBERICA made contributions to a pension plan since 1999, totalling EUR 2,842,047.55, including an extraordinary contribution of EUR 2,200,000.00, which was agreed by its Board of Directors on 22 September 2004 and paid to the insurance company managing the pension plan on ... Continue to full case
Singapore vs Intevac Asia Pte Ltd, October 2020, High Court, Case No [2020] SGHC 218, Tax Appeal No 3 of 2020

Singapore vs Intevac Asia Pte Ltd, October 2020, High Court, Case No [2020] SGHC 218, Tax Appeal No 3 of 2020

The Intevac group initially focused on designing and producing thin-film production systems for the manufacturing of hard disk drives (“HDD”). However, sometime in or around the mid-2000s, Intevac Asia Pte Ltd received a purchase order for a tool designed for the manufacturing of solar cells. Intevac Asia Pte Ltd did not possess the relevant R&D capabilities to develop such a tool and therefore entered into a Research and Development Services Agreement with Intevac US dated 1 October 2008 (“the RDSA”). The RDSA provided that Intevac US would undertake R&D activities in the US for the benefit of Intevac Asia Pte Ltd. In 2009, the management of the Intevac group decided to plan for the possibility that Intevac Asia Pte Ltd would expand its R&D capabilities in relation to non-HDD products. Accordingly, Intevac Asia Pte Ltd and Intevac US entered into a Cost-Sharing Agreement dated 1 November 2009 (“the CSA”), which superseded the RDSA. The purpose of the CSA was to ... Continue to full case
US vs Altera Corp, June 2020, Supreme Court - review denied, Case no 19-1009

US vs Altera Corp, June 2020, Supreme Court – review denied, Case no 19-1009

Altera’s request for a Supreme Court review of the decision issued by the US Court of Appeal in June 2019 has been denied. A case cannot, as a matter of right, be appealed to the U.S. Supreme Court. A party seeking to appeal to the Supreme Court from a lower court decision must file a writ of certiorari. If a court grants the writ of certiorari, then that court will hear that case. However, if four Justices do not agree to review the case, the Court will not hear the case. This is defined as denying certiorari. Altera’s request for Supreme Court review of the decision issued by the Court of Appeal. Altera Reply 19-1009 Cert Reply Brief The Commissioner of Internal Revenue’s response to Alteras request Internal revenue brief for respondent in opposition 19-1009 Altera Corp. Opp ... Continue to full case
Norway vs A/S Norske Shell, May 2020, Supreme Court, Case No HR-2020-1130-A

Norway vs A/S Norske Shell, May 2020, Supreme Court, Case No HR-2020-1130-A

A / S Norske Shell runs petroleum activities on the Norwegian continental shelf. By the judgment of the Court of Appeal in 2019, it had been decided that there was a basis for a discretionary tax assessment pursuant to section 13-1 of the Tax Act, based on the fact that costs for research and development in Norway should have been distributed among the other group members. According to section 13-1 third paragraph of the Norwegian Tax Act the Norwegian the arms length provisions must take into account OECD’s Transfer pricing guidelines. And according to the Court of Appeal the Petroleum Tax Appeals Board had correctly concluded – based on the fact – that this was a cost contribution arrangement. Hence the income determination then had to be in accordance with what follows from the OECD guidelines for such arrangements (TPG Chapter VIII). The question before the Supreme Court was whether this additional income assessment should also include the part of ... Continue to full case

Altera asking the US Supreme Court for a judicial review of the 2019 Decision from the U.S. Court of Appeals concerning the validity of IRS regs. on CCAs

Altera has asked the US Supreme Court for a judicial review of the Decision from the U.S. Court of Appeals for the Ninth Circuit over the validity of Internal Revenue Service regulations  that requires related companies to share the cost of stock-based employee compensation when shifting their intangible assets abroad applying US Cost Sharing regulations. In the decision a divided panel in the Court of Appeal upheld the regulation as “permissible” and therefore entitled to deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). In the Petition Altera presents three questions: 1. Whether the Treasury Department’s regulation is arbitrary and capricious and thus invalid under the Administrative Procedure Act, 5 U.S.C. 551 et seq. 2. Whether, under SEC v. Chenery Corp., 332 U.S. 194 (1947), the regulation may be upheld on a rationale the agency never advanced during rulemaking. 3. Whether a procedurally defective regulation may be upheld under Chevron on the ground that ... Continue to full case
Brazil vs "CCA group", September 2019, COSIT, SC No. 276-2019

Brazil vs “CCA group”, September 2019, COSIT, SC No. 276-2019

In a public ruling, the General Tax Coordination Office in Brazil (COSIT) found that a transaction labled as a “cost sharing agreement” between a foreign group and its Brazilian subsidiary, was in fact a mere agreement for provision of services. COSIT pointed to the key characteristics of cost sharing agreements. These had been listed in a prior ruling from 2012: Segregation of costs and risks inherent in the development, production or acquisition of goods, services or rights; Consistent contribution by each entity with expected and effectively-received benefits by each entity; Identification of the benefit to each participant entity; Mandatory reimbursement of costs incurred with no mark-up; Advantages offered to all participating group entities; and Payments for support activities whether such activities were actually used. < COSIT also pointed to the guidance provided in the 2017 Transfer Pricing Guidelines, Chapter VIII. Click here for translation SC_Cosit_n_276-2019 ... Continue to full case
Spain vs EPSON IBÉRICA S.A.U., Feb 2018, High Court, Case No 314/2016

Spain vs EPSON IBÉRICA S.A.U., Feb 2018, High Court, Case No 314/2016

EPSON IBÉRICA S.A.U. had deducted the full employee pension costs of a CEO that had worked both for the HQ in the Netherlands and the local Spanish Company. The tax authorities issued an assessment where 90% of the pension costs had been disallowed in regards to the taxable income in Spain. The disallowed percentage of the costs was based on the CEO’s salary allocation between Netherlands (90%) and Spain (10%), cf. the agreement entered between the parties. EPSON IBÉRICA S.A.U. brought the assessment to the Courts. Judgement of the Court The High Court dismissed the appeal of EPSON IBÉRICA S.A.U. and decided in favour of the tax authorities. Excerpt “…this Chamber shares and endorses the detailed reasoning of the TEAC starting from a fundamental fact, that if the contract of 25 June 2004, firmado between Mr. Humberto and Sek, by which the latter was appointed as Riji of Epson, Chairman of Epson Europe BV and President of Epson Ibérica, S.A.U. and of ... Continue to full case

TPG2017 Chapter VIII Annex example 5

21. The facts are the same as in Example 4 except that the functional analysis indicates Company A has no capacity to make decisions to take on or decline the risk-bearing opportunity represented by its participation in the CCA, or to make decisions on whether and how to respond to the risks associated with the opportunity. It also has no capability to mitigate the risks or to assess and make decisions relating to the risk mitigation activities of another party conducted on its behalf. 22. In accurately delineating the transactions associated with the CCA, the functional analysis therefore indicates that Company A does not control its specific risks under the CCA in accordance with the guidance in paragraph 8.15 and consequently is not entitled to a share in the output that is the objective of the CCA ... Continue to full case

TPG2017 Chapter VIII Annex example 4

Company A and Company B are members of an MNE group and decide to undertake the development of an intangible through a CCA. The intangible is anticipated to be highly profitable based on Company B’s existing intangibles, its track record and its experienced research and development staff. Company A performs, through its own personnel, all the functions expected of a participant in a development CCA obtaining an independent right to exploit the resulting intangible, including functions required to exercise control over the risks it contractually assumes in accordance with the principles outlined in paragraphs 8.14 to 8.18. The particular intangible in this example is expected to take five years to develop before possible commercial exploitation and if successful, is anticipated to have value for ten years after initial Exploitation. Under the CCA, Company A will contribute to funding associated with the development of the intangible (its share of the development costs are anticipated to be USD 100 million per year ... Continue to full case
TPG2017 Chapter VIII Annex example 3

TPG2017 Chapter VIII Annex example 3

15. The facts are the same as Example 1, except that the per-unit value of Service 2 is 120 (that is, both Service 1 and Service 2 are equally valuable, and neither are low-value services). 16.          Under the CCA, the value of Company A and Company B’s contributions should each correspond to their respective proportionate shares of expected benefits i.e. 50%. Since the total value of contributions under the CCA is 6 000, this means each party must contribute 3 000. The value of Company A’s in-kind contribution is 3 600. The value of Company B’s in- kind contribution is 2 400. Accordingly, Company B should make a balancing payment to Company A of 600. This has the effect of “topping up” Company B’s contribution to 3 000; and offsets Company A’s contribution to the same amount. Example 3 illustrates that, in general, assessing contributions at cost will not result in an arm’s length outcome even in those situations in which the arm’s ... Continue to full case

TPG2017 Chapter VIII Annex example 2

Example 2 12. The facts are the same as Example 1, except that the per-unit value of Service 1 is 103 (that is, both Service 1 and Service 2 are low-value services). Assume, therefore, that the calculation of the costs and value of the services is as follows: Cost to Company A of providing services (30 units * 100 per unit) 3 000 (60% of total costs) Cost to Company B of providing services (20 units * 100 per unit) 2 000 (40% of total costs Total cost to group 5 000 Value of contribution made by Company A (30 units * 103 per unit) 3 090 (59.5%     of     total contributions) Value of contribution made by Company B (20 units * 105 per unit) 2 100 (40.5%     of     total contributions) Total value of contributions made under the CCA 5 190 Company A and Company B each consume 15 units of Service 1 and 10 units of Service 2: Benefit to Company ... Continue to full case

TPG2017 Chapter VIII Annex example 1a

8. The facts are the same as Example 1. In accordance with the guidance in paragraph 8.27, an alternative way to achieve the identical result under Example 1 is through the use of a two-step process as set out below 9. Step 1 (contributions measured at cost): Company A should bear 50% of the total cost of 5 000, or 2 500. The cost of Company A’s in-kind contribution is 3 000. Company B should bear 50% of the total cost, or 2 500. The cost of Company B’s in-kind contribution is 2 000. Company B should thus make an additional payment to Company A of 500. This reflects a balancing payment associated with current contributions 10. Step 2 (accounting for additional contributions of value to the CCA): Company A produces 20 of value above costs per unit. Company B produces 5 of value above costs per unit. Company A consumes 10 units of Service 2 (50 of value over ... Continue to full case

TPG2017 Chapter VIII Annex example 1

Example 1 illustrates the general principle that contributions should be assessed at value (i.e. based on arm’s length prices) in order to produce results that are consistent with the arm’s length Company A and Company B are members of an MNE group and decide to enter into a CCA. Company A performs Service 1 and Company B performs Service 2. Company A and Company B each “consume” both services (that is, Company A receives a benefit from Service 2 performed by Company B, and Company B receives a benefit from Service 1 performed by Company A). Assume that the costs and value of the services are as follows: Costs of providing Service 1 (cost incurred by Company A) 100 per unit. Value of Service 1 (i.e. the arm’s length price that Company A would charge Company B for the provision of Service 1) 120 per unit. Costs of providing Service 2 (cost incurred by Company B) 100 per unit. Value of ... Continue to full case

TPG2017 Chapter VIII paragraph 8.53

Over the duration of the CCA term, the following information could be useful: a) any change to the arrangement (e.g. in terms, participants, subject activity), and the consequences of such change b) a comparison between projections used to determine the share of expected benefits from the CCA activity with the actual share of benefits (however, regard should be had to paragraph 3.74) c) the annual expenditure incurred in conducting the CCA activity, the form and value of each participant’s contributions made during the CCA’s term, and a detailed description of how the value of contributions is determined ... Continue to full case

TPG2017 Chapter VIII paragraph 8.52

The following information would be relevant and useful concerning the initial terms of the CCA: a) a list of participants b) a list of any other associated enterprises that will be involved with the CCA activity or that are expected to exploit or use the results of the subject activity c) the scope of the activities and specific projects covered by the CCA, and how the CCA activities are managed and controlled d) the duration of the arrangement e) the manner in which participants’ proportionate shares of expected benefits are measured, and any projections used in this determination f) the manner in which any future benefits (such as intangibles) are expected to be exploited g) the form and value of each participant’s initial contributions, and a detailed description of how the value of initial and ongoing contributions is determined (including any budgeted vs actual adjustments) and how accounting principles are applied consistently to all participants in determining expenditures and the ... Continue to full case

TPG2017 Chapter VIII paragraph 8.51

The transfer pricing documentation standard set out in Chapter V requires reporting under the master file of important service arrangements and important agreements related to intangibles, including CCAs. The local file requires transactional information including a description of the transactions, the amounts of payments and receipts, identification of the associated enterprises involved, copies of material intercompany agreements, and pricing information including a description of reasons for concluding that the transactions were priced on an arm’s length basis. It would be expected that in order to comply with these documentation requirements, the participants in a CCA will prepare or obtain materials about the nature of the subject activity, the terms of the arrangement, and its consistency with the arm’s length principle. Implicit in this is that each participant should have full access to the details of the activities to be conducted under the CCA, the identity and location of the other parties involved in the CCA, the projections on which the ... Continue to full case

TPG2017 Chapter VIII paragraph 8.50

8.50 Generally, a CCA between controlled parties should meet the following conditions: a) The participants would include only enterprises expected to derive mutual and proportionate benefits from the CCA activity itself (and not just from performing part or all of that activity). See paragraph 8.14. b) The arrangement would specify the nature and extent of each participant’s interest in the results of the CCA activity, as well its expected respective share of benefits. c) No payment other than the CCA contributions, appropriate balancing payments and buy-in payments would be made for the particular interest or rights in intangibles, tangible assets or services obtained through the CCA. d) The value of participants’ contributions would be determined in accordance with these Guidelines and, where necessary, balancing payments should be made to ensure the proportionate shares of contributions align with the proportionate shares of expected benefits from the arrangement. e) The arrangement may specify provision for balancing payments and/ or changes in the ... Continue to full case

TPG2017 Chapter VIII paragraph 8.49

When a CCA terminates, the arm’s length principle requires that each participant retains an interest in the results, if any, of the CCA activity consistent with their proportionate share of contributions to the CCA throughout its term (adjusted by any balancing payments actually made, including those made as a result of the termination), or is appropriately compensated for any transfer of that interest to other participants ... Continue to full case

TPG2017 Chapter VIII paragraph 8.48

Buy-in and buy-out payments should be treated for tax purposes in the same manner as would apply under the general rules of the tax system(s) (including conventions for the avoidance of double taxation) applicable to the respective participants as if the payment were made outside a CCA as consideration for the acquisition or disposal of the interest in the results of the prior CCA activity ... Continue to full case

TPG2017 Chapter VIII paragraph 8.47

The guidance in Chapters I – III and Chapter VI is fully applicable to determining the arm’s length amount of any buy-in, buy-out or balancing payments required. There may be instances where no such payments are required under the arm’s length principle. For example, a CCA for the sharing of administrative services would generally only produce benefits to participants on a current basis, rather than any valuable on-going results ... Continue to full case
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