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.