Germany adopts Chapter VIII of OECD TP Guidelines 2017 for Cost Contribution Agreements

Comparison of the CCA concepts

The Ger­man tax aut­ho­ri­ties´ CCA con­cept is ba­sed on the prin­ci­ple of cost poo­ling. The par­ti­ci­pants of a CCA form an (un­dis­clo­sed) part­nership with the pur­pose to jointly be­ne­fit from ac­tivi­ties un­der­ly­ing the costs poo­led in the CCA. This part­nership car­ries out func­tions and be­ars risks con­nec­ted with the poo­led ac­tivi­ties. Con­se­quently, the contri­bu­ti­ons of the par­ti­ci­pants are va­lued with their re­spec­tive costs. Those costs are al­lo­ca­ted to the par­ti­ci­pants pro rata to their ex­pec­ted be­ne­fits from the CCA wi­thout mark-ups and form the ba­sis for ba­lan­cing pay­ments bet­ween the par­ti­ci­pants. This con­cept ap­plies ir­re­spec­tive of the type of ac­tivi­ties poo­led in the CCA (pro­vi­ded the pre­con­di­ti­ons to par­ti­ci­pate in such a pool are met).

In con­trast, the OECD in Chap­ter VIII of its TP Gui­de­lines 2017 un­der­stands a CCA as a per­for­mance contri­bu­tion agree­ment bet­ween mem­bers of a pool, which of­fers sim­pli­fi­ca­tion for ca­ses of mul­ti­ple tran­sac­tions in which each pool par­ti­ci­pant per­forms func­tions while sha­ring the re­spec­tive risks with the other par­ti­ci­pants. Con­se­quently, the contri­bu­ti­ons of the par­ti­ci­pants to the CCA are eva­lua­ted with their eco­no­mic va­lue de­ter­mi­ned un­der the arm´s length prin­ci­ple. The contri­bu­ted va­lue, in turn, is al­lo­ca­ted to the par­ti­ci­pants pro rata to their ex­pec­ted be­ne­fits and forms the ba­sis for ba­lan­cing pay­ments.

Re­gar­ding the va­lua­tion of the contri­bu­ti­ons, the OECD dis­tin­gu­is­hes bet­ween low-va­lue-ad­ding ac­tivity CCAs and other CCAs. In case the ac­tivi­ties poo­led in a CCA are of low va­lue ad­ding na­ture (de­fi­ni­tion no. 7.44 of the OECD TP Gui­de­lines 2017) the OECD for prac­tical re­asons sta­tes that the contri­bu­ti­ons may be va­lued at cost since in such ca­ses the arm’s length va­lue of the ser­vices are close to the re­spec­tive costs. The­re­fore, a mere low va­lue ad­ding ac­tivity CCA such as an ad­mi­nis­tra­tive ac­tivity CCA is prac­tically trea­ted equally un­der the OECD con­cept and un­der the (old) Ger­man tax aut­ho­ri­ties´ con­cept.

For other CCAs - in par­ti­cu­lar, CCAs con­cerning R&D ac­tivi­ties - the contri­bu­ti­ons to the CCA can­not be de­ter­mi­ned on a pure cost base but re­qui­res each contri­bu­tion to be va­lued in ac­cor­dance with the arm´s length prin­ci­ple. Even though this ap­proach might be clear in theory, this lea­ves the tax­payer with a cer­tain amount of in­se­cu­rity par­ti­cu­larly re­gar­ding CCAs, which in­volve func­tions, tan­gi­bles or in­tan­gi­bles which might be hard to va­lue. Thus, we ex­pect a high risk that each tax aut­ho­rity in­vol­ved in a CCA will as­sume high va­lue contri­bu­ti­ons by CCA par­ti­ci­pants tax re­si­dent in their re­spec­tive coun­try, as those contri­bu­ti­ons - to­ge­ther with the par­ti­ci­pants´ be­ne­fits - are de­cisive for de­ter­mi­ning the arm´s length com­pen­sa­tion to be re­cei­ved from other par­ti­ci­pants un­der a CCA.

Transfer pricing documentation and recommendations

In prin­ci­ple, in case an in­ter­na­tio­nal group with group mem­bers in Ger­many has a CCA in place spe­ci­fic do­cu­men­ta­tion needs to be in­clu­ded in the Lo­cal and Mas­ter File. As the ap­plica­ble CCA con­cept will change with ef­fect from 1 Ja­nu­ary 2019 (for CCAs im­ple­men­ted be­fore the publis­hing date of the cir­cu­lar with ef­fect from 1 Ja­nu­ary 2020), it is re­com­men­ded to re­view exis­ting CCAs. Fo­cus should be di­rec­ted to the cha­rac­te­ristics of the ac­tivi­ties poo­led in the CCA.

In case a CCA ex­clu­si­vely in­clu­des low va­lue ad­ding ser­vices, the ap­pli­ca­tion of OECD prin­ci­ples will most li­kely not have a prac­tical im­pact, as contri­bu­ti­ons and ba­lan­cing pay­ments should be va­lued at cost base. Still, it is ad­visa­ble to pre­pare do­cu­men­ta­tion re­gar­ding the cha­rac­te­ristics of the ac­tivi­ties poo­led in the CCA to be able to de­mons­trate towards the Ger­man (and other in­vol­ved) tax aut­ho­ri­ties that they are of low va­lue na­ture only.

If other ac­tivi­ties are in­clu­ded in the CCA - par­ti­cu­larly R&D ac­tivi­ties - it is stron­gly re­com­men­ded to re­view whe­ther a pre­cise de­ter­mi­na­tion of the va­lue of the contri­bu­ti­ons pro­vi­ded by each par­ti­ci­pant is pos­si­ble. In case pos­si­ble, care­ful do­cu­men­ta­tion is ad­vi­sed for de­mons­tra­tion pur­po­ses. Should a pre­cise va­lua­tion not be pos­si­ble, we see si­gni­fi­cant risks that the ba­lan­cing pay­ments made un­der a CCA re­sults in ex­ten­sive ar­gu­men­ta­ti­ons with the Ger­man and in­ter­na­tio­nal tax aut­ho­ri­ties. Con­se­quently, in such ca­ses it might be re­com­men­da­ble to eva­luate al­ter­na­tive struc­tu­ring for the ac­tivi­ties per­for­med un­der the CCA.