TPG2022 Chapter VIII Annex example 1

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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 per unit.

Value of Service 2 (i.e. the arm’s length price that Company B would charge Company A for the provision of Service 2) 105 per unit

4. In Year 1 and in subsequent years, Company A provides 30 units of Service 1 to the group and Company B provides 20 units of Service 2 to the group. Under the CCA, the calculation of costs and benefits are 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 * 120 per unit) 3 600 (63% of total contributions)
Value of contribution made by Company B (20 units * 105 per unit) 2 100 (37% of total contributions)
Total value of contributions made under the CCA 5 700

Company A and Company B each consume 15 units of Service 1 and 10 units of Service 2: Benefit to Company A:

 

Benefit to Company B
Service 1: 15 units * 120 per unit 1 800
Service 2: 10 units * 105 per unit 1 050
Total 2 850 (50% of total value of 5700)

 

 

Service 1: 15 units * 120 per unit 1 800
Service 2: 10 units * 105 per unit 1 050
Total 2 850 (50% of total value of 5700)

 

5. 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 5700, this means each party must contribute 2 850. The value of Company A’s in-kind contribution is 3600 and the value of Company B’s in-kind contribution is 2 100. Accordingly, Company B should make a balancing payment to Company A of 750. This has the effect of “topping up” Company B’s contribution to 2850; and offsets Company A’s contribution to the same amount.

6. If contributions were measured at cost instead of at value, since Companies A and B each receive 50% of the total benefits, they would have been required contribute 50% of the total costs, or 2 500 each, i.e. Company B would have been required to make a 500 (instead of 750) balancing payment to A.

7. In the absence of the CCA, Company A would purchase 10 units of Service 2 for the arm’s length price of 1050 and Company B would purchase 15 units of Service 1 for the arm’s length price of 1 800. The net result would be a payment of 750 from Company B to Company A. As can be shown from the above, this arm’s length result is only achieved in respect of the CCA when contributions are measured at value.

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