Submission on Transfer Pricing Treatment of Cost Contribution Arrangements
This report consists of a draft revised chapter of the OECD Transfer Pricing Guidelines, with no indication of the changes made, or explanation of the reasons or intended effects, which makes the issues effectively inaccessible to all except the insider community of practitioners. This along with several other reports will result in extensive revisions and additions to the Guidelines, but it will be a piece-meal patch-up, incoherent and in some respects contradictory. The revised text could be adopted and have effect around the world, even in countries outside the OECD and G20, without the need for adoption by states. We therefore recommend that it should be regarded as only provisional, and a more fundamental reconsideration should be begun, in conjunction with the UN Tax Committee.
There can be good reasons for MNEs to share within the group the costs of activities which benefit various parts. However, such collaborative arrangements within MNEs are generally coordinated administratively, and are very different from contractual arrangements negotiated between genuinely independent enterprises each with its own separate business. Based on the mistaken starting point that CCAs between related parties should be treated as if they had been negotiated by independent ones, the proposals in this draft are contradictory and imprecise, difficult to administer, and in their present form would be ineffective in preventing MNEs from using CCAs for BEPS purposes. The suggestion that contributions should be priced according to the value of the benefits and not normally on their costs will again lead tax authorities into the quagmire of searching for non-existent comparables or estimating hypothetical values. On the other hand, it accepts that costs should usually be shared by applying an appropriate allocation key, and aims to prevent inappropriate outcomes by allowing subsequent adjustments to valuations and introducing the requirement that participants in a CCA must have the ‘capability and authority to control’ risks.
We support these proposals, as necessary measures to check CCAs from being used for profit-shifting, and indeed suggest that they should be strengthened. We nevertheless deplore the increased complexity which is needed to make the Guidelines effective, due to the adoption of a mistaken approach. In view of the many tax planning mechanisms available to MNEs for fragmenting activities and attributing functions to different entities, separating supposedly routine activities, such as contract manufacturing or distribution, from supposedly high-value functions such as design, financial services, or IP management, to allow MNEs also to plan allocation of joint costs without considering apportionment of profits is a continued encouragement to BEPS behaviour.