INTM463090 - Transfer Pricing: OECD and methodologies: Cost Contribution Arrangements ('CCAs')

Nearly all transfer pricing cases will involve one of the five methodologies described in INTM463030 to INTM463080 but occasionally associated enterprises enter into arrangements to share costs and they involve a different means of ensuring consistency with the arm’s length principle.

The OECD refers to these as ‘cost contribution arrangements’ (“CCAs”) and there is extensive discussion of them in Chapter VIII of the OECD Transfer Pricing Guidelines. They may sometimes be referred to loosely as ‘cost sharing arrangements’ but the principles in Chapter VIII will still apply to them.

As noted in Paragraph 8.3 of the OECD Guidelines, a CCA is a framework for 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 those assets, services or rights.’ The two fundamental principles on which the CCA concept is founded are that

• its participants have the expectation of mutual benefit from the activity and agree to share the contributions to that activity in proportion to the benefits each expects to obtain; and
• each participant has an ownership interest in the property acquired or the intangibles resulting from the activity which it can exploit separately in its own interests without payment of further consideration to anyone

The second of these two principles may not apply in some cases, e.g. where the arrangement is to share the cost and risks of service provision which does not result in an exploitable asset. However, such arrangements may nevertheless constitute a CCA.

CCAs between unrelated enterprises are not common in most sectors of industry perhaps because independents tend to favour other structures for sharing costs or pooling resources. That is no reason to question the bona fides of a CCA between associated enterprises as there are often good commercial reasons for them to seek to share costs including

• spreading the risk and thus reducing the potential for large losses from an activity, e.g. on long-term, capital intensive R&D projects with a high chance of failure
• utilising the different skills and resources of separate entities within an MNE to make possible a venture that might otherwise be beyond any single one of them
• achieving savings through economies of scale and removing duplication, e.g. by obtaining services in common
• avoiding a complicated web of intra-group agreements charging royalties or service fees

Accordingly, CCAs can be viewed as an alternative mechanism for establishing the sort of collaborative arrangements for the sharing of costs and pooling resources that are commonly seen, though perhaps in different form, between third parties.

It is nevertheless important, if the level of tax risk warrants it and subject to the transfer pricing governance at INTM453000 onwards, to consider a CCA carefully to ensure that the methods employed to share contributions amongst its participants do not differ from those that would have been agreed between independents in similar circumstances.

Paragraph 8.7 of the OECD Guidelines mentions that CCAs can exist for obtaining intra-group services. You may need to consider whether an agreement to provide intra-group services constitutes a CCA rather than an intra-group services arrangement for which another method may be more appropriate (see INTM464050). A CCA may be distinguished from the latter through the concept of mutual benefit and the sharing of contributions to that activity in proportion to the benefits each participant expects to obtain.

It can be difficult to identify the existence of a CCA from accounts and tax computations although changes in the entries could indicate a newly introduced CCA and so may be worth following up. A good knowledge of the business and the structure of a group will help to gauge the potential for cost sharing but the best way to identify a CCA is to ask the group itself in risk assessment discussions whether it has any cost sharing arrangements in place in which UK entities participate. Please let CTIAA’s Transfer Pricing Team know about any CCA’s you encounter.

If contributions are not in line with those that independents would have agreed in similar circumstances, they should be adjusted in line with Paragraph 8.27 of the OECD Guidelines. That paragraph cautions against making minor or marginal adjustments and, generally, adjustments based on evidence from a single year should be avoided. That is because CCAs are often long-term projects where costs and benefits may need to be measured over a period of years.

Only exceptionally will it be appropriate to disregard part or all of the terms of the CCA in accordance with 8.29 and 8.30 of the Guidelines. Such cases should be referred to CTIAA, Business International Transfer Pricing Team for advice before any suggestion of a disregard is made to a taxpayer or its advisors.