The Joint Transfer Pricing Forum is a body that brings together representatives of tax authorities and businesses across the European Union (EU) to discuss practical solutions to problems that have arisen with regard to transfer pricing issues. The Forum aims where possible to help the smooth running of tax affairs in the EU by suggesting non-legislative solutions to practical problems. So far, the JTPF has drawn up codes of conduct on EU transfer pricing documentation and on the effective implementation of the EU Arbitration Convention. These codes of conduct have been adopted by the European Commission.
The JTPF discussions on cost contribution arrangements arise mainly from the perception by business that such arrangements are often not recognised in practice by tax authorities who may therefore question why particular cross-border transfers have been made at cost rather than being subject to a profit element (such as a mark-up on cost). The tax authorities in this situation may try to apply their national transfer pricing rules to adjust the price of contributions made to the cost contribution arrangement. Business members of the JTPF consider that if there could be more awareness within tax administrations of the nature of cost contribution arrangements and the different forms that they can take, there would fewer transfer pricing disputes in this area.
The work done within the JTPF would aim to produce a set of guidelines or a code of conduct that would be of help in practical transfer pricing situations, setting out best practice in respect of cost contribution arrangements or giving guidance on specific aspects of such arrangements. The JTPF would not be looking to change any of the guidance given by the OECD Transfer Pricing Guidelines which are the internationally accepted best practice in transfer pricing situations and contain a chapter on cost contribution arrangements. Instead, the JTPF would look in more detail at situations arising in the EU and give detailed guidance on particular practical problems encountered by EU businesses.
Cost Contribution Arrangements
A cost contribution arrangement (referred to in US tax legislation as a cost sharing arrangement) is described by the OECD transfer pricing guidelines as “a framework agreed among business 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”. From a transfer pricing point of view, the costs contributed by each party participating in the cost contribution arrangement should be in proportion to the current or future benefits expected to be received from the arrangement, for example benefits obtained from intangible assets developed under the cost contribution arrangement.
Modern cost contribution arrangements (CCAs) may be projects involving high cost and risk for developing advanced intangible assets. This may require the input of cash, research, expertise and intangible assets from subsidiary companies located in various jurisdictions. The complexity of this type of arrangement may lead to tax administrations, many of whom do not have expertise with CCAs, failing to recognise these cross-border transfers as relating to a cost contribution arrangement. Issues arising include the question of ownership of the intangible property developed and the allocation of the costs and profits from the creation of the intangible assets by the CCA.
In addition to this there are problems arising from companies that join or leave a CCA after it has already begun. Companies joining a CCA at a later stage would need to make a payment to compensate the other participants for the work that has already done under the agreement, for which they are now receiving the benefit. Companies leaving the CCA would need to calculate a payment or repayment based on contributions made to date and benefits received from the arrangement.
The experience of businesses in the EU has been that when tax authorities come across payments made under this type of arrangement they have different approaches to the tax treatment and pricing of the contributions to the arrangement, and this can lead to uncertainty and the danger of double taxation on the group.
Areas Where Guidance is Needed
Discussions within the JTPF suggested that the tax authorities themselves have not identified cost contribution arrangements as being an issue that requires further guidance, whereas businesses regard this as a high profile issue in need of urgent attention. This could be a result of the failure of tax authorities to identify these arrangements.
The problem of cost contribution arrangements in the EU can therefore be summarised as consisting of three main elements, these being:
- The variety of different types of CCA set up by multinational enterprises;
- The lack of experience of tax administrations in dealing with CCAs; and
- Different tax treatment of various aspects of CCAs in different countries.
The task of the EU JTPF is therefore to assist in improving the understanding of CCAs and to ensure greater consistency in the treatment of CCAs across EU member states. If the basic principles of a CCA are understood by tax administrations it will be possible to apply those principles to the variety of types of CCA that arise in practice so as to ensure greater consistency in their treatment.
The OECD Transfer Pricing Guidelines give a few examples of CCAs, but these do not cover the variety and complexity of arrangements found within multinational enterprises. The JTPF might be able to put together more detailed examples of cost contribution arrangements that would serve as a guide to EU tax authorities. They might also give examples of arrangements that are similar to CCAs but are not CCAs because they do not fulfil the necessary requirements. Such examples would help tax authorities to distinguish CCAs from other arrangements.
The JTPF could also look at the necessary documentation and the other information about a CCA that needs to be supplied to the tax authorities. It might also be useful to produce some guidelines on the exchange of information between EU tax authorities about a particular CCA. The JTPF could also identify the key issues with respect to CCAs that tax authorities should look at, for example establishing the cost base and the valuation of expected benefits from the CCA, and the need to consider looking for specialist advice on valuations. All these issues could be put together in a reference document for use by EU tax administrations.
The OECD itself is at present involved in a project relating to transfer pricing for intangible assets. Cost contribution arrangements will be considered by the OECD during that project. Any guidance issued by the JTPF will therefore need to take into account the results of that OECD work. The JTPF expects to complete the preparation of its guidance on CCAs by the end of 2011.
Sources:
EU website at Europa.eu
“OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” (last updated in August 2010), published by the OECD
Peter Hann - Peter Hann is a UK Chartered Accountant based in Croydon, UK who holds an advanced diploma in international taxation and is involved in ...
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