Tag: Cost Contribution Arrangement (CCA)

A Cost Contribution Arrangement (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 Cost Sharing Arrangement (CSA).

TPG2022 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 ... Read more

TPG2022 Chapter VIII Annex example 4

17. 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. 18. 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 ... Read more
TPG2022 Chapter VIII Annex example 3

TPG2022 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 ... Read more

TPG2022 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 ... Read more

TPG2022 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 ... Read more

TPG2022 Chapter VIII Annex example 1

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 2. 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). 3. 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 ... Read more

TPG2022 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 ... Read more

TPG2022 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 ... Read more

TPG2022 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 ... Read more

TPG2022 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 ... Read more

TPG2022 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 ... Read more

TPG2022 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 ... Read more

TPG2022 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 ... Read more

TPG2022 Chapter VIII paragraph 8.46

Similar issues could arise when a participant leaves a CCA. In particular, a participant that leaves a CCA may dispose of its interest in the results, if any, of past CCA activity (including work in progress) to the other participants. Any such transfer should be compensated according to the arm’s length principle. Such compensation is referred to in this chapter as a “buy-out payment” ... Read more

TPG2022 Chapter VIII paragraph 8.45

The amount of a buy-in payment should be determined based upon the value (i.e. the arm’s length price) of the interest in the intangibles and/or tangible assets the new entrant obtains, taking into account the new entrant’s proportionate share of the overall expected benefits to be received under the CCA. There may also be cases where a new participant brings existing intangibles or tangible assets to the CCA, and that balancing payments may be appropriate from the other participants in recognition of this contribution. Any balancing payments to the new entrant could be netted against any buy-in payments required, although appropriate records must be kept of the full amounts of the separate payments for tax administration purposes ... Read more

TPG2022 Chapter VIII paragraph 8.44

Changes in the membership of a CCA will generally trigger a reassessment of the proportionate shares of participants’ contributions and expected benefits. An entity that becomes a participant in an already active CCA might obtain an interest in any results of prior CCA activity, such as completed or work-in-progress intangibles or tangible assets. In such cases, the previous participants effectively transfer part of their respective interests in the results of the prior CCA activity to the new entrant. Under the arm’s length principle, any such transfer of intangibles or tangible assets must be compensated based on an arm’s length value for the transferred interest. Such compensation is referred to in this chapter as a “buy-in payment” ... Read more

TPG2022 Chapter VIII paragraph 8.43

Any balancing payment should be treated as an addition to the contribution of the payor and as a reduction in the contribution of the recipient. As with contributions generally, the character and tax treatment of any balancing payments will be determined in accordance with domestic laws, including applicable tax treaties ... Read more

TPG2022 Chapter VIII paragraph 8.42

In services CCAs, a participant’s contribution to the CCA will often give rise to benefits in the form of cost savings (in which case there may not be any income generated directly by the CCA activity). In development CCAs, the expected benefits to participants may not accrue until some time after contributions are made, and therefore there will be no immediate recognition of income to the participants on their contributions at the time they are made ... Read more

TPG2022 Chapter VIII paragraph 8.41

Contributions, including any balancing payments, by a participant to a CCA should be treated for tax purposes in the same manner as would apply under the general rules of the tax system(s) applicable to that participant if the contributions were made outside a CCA, to carry on the activity that is the subject of the CCA. The character of the contribution will depend on the nature of the activity being undertaken by the CCA, and will determine how it is recognised for tax purposes ... Read more

TPG2022 Chapter VIII paragraph 8.40

As indicated in paragraph 8.33, the guidance in Chapter VI on hard-to-value intangibles may equally apply in situations involving CCAs. This will be the case if the objective of the CCA is to develop a new intangible that is hard to value at the start of the development project, but also in valuing contributions involving pre-existing intangibles. Where the arrangements viewed in their totality lack commercial rationality in accordance with the criteria in Section D.2 of Chapter I, the CCA may be disregarded ... Read more