On 29 April 2015 the OECD published a public Discussion Draft on possible revisions to chapter VIII of the OECD Transfer Pricing Guidelines on cost contribution arrangements (CCA’s). This should be seen generally in the context of the OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS) and specifically in the context of Action 8 on Intangibles.
BEPS Action 8 is aimed at preventing BEPS by moving intangibles among group members. Updating the existing OECD guidance on CCA’s forms part of this action. Other transfer pricing aspects of intangibles were dealt with in guidance published by the OECD in September 2014, in particular regarding the identification of intangibles and the treatment of transactions involving intangibles, as well as in another discussion draft issued in December 2014, that included revised guidance generally on risk and recharacterization. It should also be noted that while the current Discussion Draft has been drawn up in the context of BEPS Action 8 on intangibles, CCA’s can involve both intangible as well as tangible assets and also services.
The key objective of the proposed update on CCA’s is to bring existing OECD guidance into line with the other BEPS measures mentioned above. However, while there has been some reformulation and rearranging of text, this has not led to extensive changes to the existing guidance.
Particular areas of change to note include the following:
Although the Discussion Draft now makes an explicit distinction between CCA’s for joint development of tangible and intangible assets and CCA’s for the provision of services, the definition of a CCA remains broadly the same. However it does make clear that the former may involve not just development but also enhancement, maintenance, protection or exploitation of such assets. The key difference between the two types is that the former typically generate future benefits whereas the latter typically generate current benefits only.
In addressing the valuation of contributions the Discussion Draft provides additional guidance, in particular when to use ‘value’ and when to use ‘cost’. Unlike the existing guidelines, the Discussion Draft advocates using the former by way of general rule, with cost being used only exceptionally, such as for low value-added services. For valuation purposes, the Discussion Draft refers to the guidance elsewhere in the Transfer Pricing Guidelines.
In determining whether a party is a participant in a CCA, the Discussion Draft has regard not only to whether there is a reasonable expectation that it will benefit (as in the existing Guidelines) but also to whether the party has adequate control over the associated risks. For these purposes the guidance in Chapter I on control of risks should be taken into account. The Discussion Draft illustrates this with a number of examples.
Although the current Transfer Pricing Guidelines refer to the need to take into account future developments in determining the arm’s length nature of CCA arrangements, such as the valuation of a participant’s contribution, the Discussion Draft addresses this in more detail, for example by suggesting that it may be necessary to account for differences between the expected and actual benefits received, or by suggesting the possible inclusion of a periodic reassessment over the lifetime of the CCA.
Since this is a public Discussion Draft it only involves recommendations, no final conclusions. Because of the interrelationship between the various elements of the BEPS actions and the possible impact of comments on the Discussion Draft, it may be that further changes will be made before this chapter of the OECD Guidelines is finalized later this year. Any concrete implications – including for the Dutch transfer pricing aspects of CCA’s - will become clear at that date.
Interested parties are invited to submit written comments by 29 May 2015.
An overview of the proposed new Chapter VIII of the Transfer Pricing Guidelines contained in the Discussion Draft is set out in the Annex.