Multinational enterprises (MNEs) involved in the development and use of intangibles under cost contribution arrangements (CCAs) should note the 29 April 2015 discussion draft proposals under Action 8 of the Base Erosion and Profit Shifting (BEPS) Action Plan. The discussion draft proposes fundamental modifications to Chapter VIII of the OECD Transfer Pricing Guidelines:
- with respect to measuring the value of contributions to CCAs and the tax characterisation of contributions, balancing payments and buy-in/ buy-out payments, and
- to make it consistent with other BEPS amendments including those addressing the fundamental issues on risk, capital, recharacterisation and intangibles.
The primary goal is to ensure that contributions are commensurate with the benefits received under a CCA. This is a difficult task when the contributions are complex and cannot be valued at cost. The guidance suggested by the OECD, although it acknowledges the need to achieve simplification, may nevertheless increase complexity and disputes. The proposed requirement in the draft that a participant in a CCA must have the capability and authority to control the risks associated with the “risk-bearing opportunity” under the CCA, while consistent with the overall theme of the BEPS project of focusing on “substance,” would be a paradigm change for CCAs. Similarly, the proposal that all of the important R&D and other development activities contributed by the participants to a CCA would need to be accounted for at arm’s length prices, rather than at cost as under the existing Guidelines, would also represent a fundamental change and make “cost contribution arrangements” a misnomer.
For a deeper discussion of how these issues might affect your business, please call your usual PwC contact.