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Database of Transfer Pricing Case Laws

TPG2022 Chapter VIII paragraph 8.37

Posted on January 20, 2022 | By OECD

Category: OECD Transfer Pricing Guidelines (2022), TPG2022 Chapter VIII: Cost Contribution Arrangements | Tag: Balancing payments, CCA/CSA, Cost Contribution Arrangement (CCA), Cost Sharing Arrangement (CSA), Development CCAs, Pre-existing contributions, Timing of adjustment

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In the case of development CCAs, variations between a participant’s proportionate share of the overall contributions and that participant’s proportionate share of the overall expected benefits may occur in a particular year. If that CCA is otherwise acceptable and carried out faithfully, having regard to the recommendations of Section E, tax administrations should generally refrain from making an adjustment based on the results of a single fiscal year. Consideration should be given to whether each participant’s proportionate share of the overall contributions is consistent with the participant’s proportionate share of the overall expected benefits from the arrangement over a period of years (see paragraphs 3.75-3.79). Separate balancing payments might be made for pre-existing contributions and for current contributions, respectively. Alternatively, it might be more reliable or administrable to make an overall balancing payment relating to pre-existing contributions and current contributions collectively. See Example 4 in the Annex to this chapter.

Related Guidelines

TPG2022 Chapter VIII Annex example 417. 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...

TPG2022 Chapter VIII paragraph 8.36Balancing payments may also be required by tax administrations where the value of a participant’s proportionate contributions of property or services at the time the contribution was made has been incorrectly determined, or where the participants’ proportionate expected benefits have been incorrectly assessed, e.g. where the allocation key when fixed...

TPG2022 Chapter VIII Annex example 1a8. 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...

TPG2022 Chapter VIII paragraph 8.34A CCA will be considered consistent with the arm’s length principle where the value of each participant’s proportionate share of the overall contributions to the arrangement (taking into account any balancing payments already made) is consistent with the participant’s share of the overall expected benefits to be received under the...

TPG2022 Chapter VIII paragraph 8.33Company A based in country A and Company B based in country B are members of an MNE group and have concluded a CCA to develop intangibles. Company B has entitlement under the CCA to exploit the intangibles in country B, and Company A has entitlement under the CCA to...

TPG2022 Chapter VIII paragraph 8.26In valuing contributions, distinctions should be drawn between contributions of pre-existing value and current contributions. For example, in a CCA for the development of an intangible, the contribution of patented technology by one of the participants reflects a contribution of pre-existing value which is useful towards the development of the...

TPG2022 Chapter VIII paragraph 8.24Contributions to a CCA may take many forms. For services CCAs, contributions primarily consist of the performance of the services. For development CCAs, contributions typically include the performance of development activities (e.g. R&D, marketing), and often include additional contributions relevant to the development CCA such as pre-existing tangible assets or...

TPG2022 Chapter VIII paragraph 8.13The expectation of mutual and proportionate benefit is fundamental to the acceptance by independent enterprises of an arrangement for sharing the consequences of risks materialising and pooling resources and skills. Independent enterprises would require that the value of each participant’s proportionate share of the actual overall contributions to the arrangement...

TPG2022 Chapter VIII paragraph 8.10Two types of CCAs are commonly encountered: those established for the joint development, production or the obtaining of intangibles or tangible assets (“development CCAs”); and those for obtaining services (“services CCAs”). Although each particular CCA should be considered on its own facts and circumstances, key differences between these two types...

TPG2022 Chapter VIII Annex example 11. 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...

Supplemental Guidance

Brazil vs “CCA group”, September 2019, COSIT, SC No. 276-2019A Brazilian subsidiary entered into a cost sharing agreement with its foreign parent group. COSIT, Brazil's General Tax Coordination Office, found in 2019 that the arrangement lacked the key characteristics of a genuine cost contribution arrangement and was in reality a services agreement. Applying the benefit test and referencing OECD...

Norway vs A/S Norske Shell, May 2020, Supreme Court, Case No HR-2020-1130-AA/S Norske Shell operated petroleum activities on the Norwegian continental shelf under a cost contribution arrangement for R&D. The tax authority assessed additional income by reallocating R&D costs to group members. Norway's Supreme Court in 2020 upheld the CCA-based assessment but ruled that R&D costs charged to licence partners on...

US vs Altera Corp, June 2020, Supreme Court – review denied, Case no 19-1009Altera sought Supreme Court review of the Ninth Circuit's 2019 ruling upholding Treasury regulations requiring employee stock option costs to be included in cost-sharing arrangements. The Supreme Court denied certiorari in June 2020, as fewer than four Justices agreed to hear the case. The Ninth Circuit decision in favour of...

Spain vs EPSON IBÉRICA S.A.U., March 2021, Supreme Court, Case No 390:2021Epson Ibérica, the Spanish subsidiary of the Seiko Epson Group, sought to deduct pension contributions totalling over EUR 2.8 million made for a dual-role executive also employed by the Dutch parent company. The Spanish tax authority disallowed the deductions under transfer pricing and cost contribution rules. Spain's Supreme Court upheld...

Spain vs EPSON IBÉRICA S.A.U., Feb 2018, Audiencia Nacional, Case No 314/2016Epson Ibérica deducted the full pension costs of a CEO shared with its Dutch parent, but Spanish tax authorities disallowed 90% of those costs based on the agreed salary split. The Spanish High Court upheld the assessment in 2018, ruling that the same 90/10 allocation applied to the CEO's bonus...

Singapore vs Intevac Asia Pte Ltd, October 2020, High Court, Case No [2020] SGHC 218, Tax Appeal No 3 of 2020Intevac Asia Pte Ltd entered into a Cost-Sharing Agreement with its US parent to jointly develop R&D capabilities for non-HDD products. The Singapore tax authority disallowed deductions for payments under the agreement, treating them as capital expenditure. The Singapore High Court in 2020 upheld the tax authority's position, finding the...

Norway vs Eni Norge AS , September 2023, District Court, Case No TSRO-2022-185908Eni Norge AS, a wholly owned subsidiary of Eni International B.V., deducted costs for technical services purchased from Italian parent Eni S.p.A. Norway's tax authority reduced those deductions after finding intra-group hourly rates deviated from external comparable rates. The Petroleum Tax Appeal Board confirmed the adjustment, and the District Court...

Norway vs Eni Norge AS, June 2024, Court of Appeal, Case No LG-2023-156824Eni Norge AS, a Norwegian subsidiary of the Eni Group, deducted costs for technical services purchased from Italian parent Eni SpA. Norwegian tax authorities reduced those deductions by over NOK 49 million across 2015 and 2016, finding internal hourly rates differed from external rates. The Court of Appeal upheld the...