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.