COST CONTRIBUTION ARRANGEMENTS
According to the transfer pricing rules, one of the points that must be drafted in the TP documentation are so-called cost contribution arrangements (CCA). But, do we really know about these agreements?
Transfer pricing guidelines define the cost contribution agreement as a contractual arrangement among business enterprises to share contributions and risks involved in the joint development, production or the obtaining of intangibles, tangibles assets or services. It is understood that these intangibles, tangibles assets or services are expected to create benefits for the individual business of each participant.
These types of agreements are regulated by article 18.7 of the Corporate Income Tax Law 27/2017, 27th November, the article 18 of the Royal Decree 634/2015, 100th July and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
A cost contribution arrangement should include the responsibilities, risks assumed and expected benefits of each party, as well as the allocation of contributions. The latter information is the distinguishing feature of the CCA compared to normal agreements. In order to meet the arm’s length principle, at the time of entering into a CCA, the contribution of each party must be in line with the proportional share of the expected benefit.
If the value of a participant’s share over all contributions under a CCA is not consistent with that participant’s share of expected benefits, the arm’s length principle would require and adjustment to the contribution through making a balancing payment.
What are Cost Contribution Arrangement useful for?
In certain circumstances, multinational enterprises carry out a multitude of related transactions in order to provide services necessary for one of the parties, sell goods or grant licenses, among other transactions.
Well, in some cases, intragroup payments could be replaced by a simpler method focusing on the profits obtained and the contributions made. For example, a CCA to develop an intangible asset would avoid conducting licensing agreements between the group companies for the exploitation or use of the intangible asset, since the CCA would allow each party to be entitled to ownership of the party, in accordance with the contribution made.
Types of Cost Contribution Arrangements
There are basically two types of CCA, which are as follows:
- Those that are used to develop, produce, or obtain intangible goods. The main characteristics of this type of contract are:
- The contribution of the parties are usually development activities, such as R&D or marketing, as well as some intangible assets;
- The expected benefit is an ongoing and future benefit, which involves significant risks of uncertain benefits.
- For tax purposes, the expected benefits may not accrue until sometime after contributions are made and, hence, the participant will not recognise the income on their contributions at the time they are made.
2. Those that are created to obtain services. The main characteristics of this type of agreements are the following:
- The contribution of the parties involved in a CCA are, usually, services;
- The expected benefit is a current benefit, which reduces the risk and the uncertainty implicit in the generation of future benefits.
- For tax purposes, the expected benefit will, usually, be generated in form of cost savings, so, in that cases may not be any income generated directly by the CCA activity.
Deductibility of expenses arising from a Cost Contribution Arrangement
The expenses associated with a CCA will be considered deductible if the requirements established in Article 18.7 of the Spanish CIT are met. These requirements are as follows:
- All parties that sign the agreement must have access to the property or other right with similar economic consequences on the assets or rights that are the object of the acquisition, production or development as a result of the agreement.
- The contribution of each participant will be made considering the expected benefit or advantages that are expected to be obtained from the agreement.
- The agreement must contemplate the variation of its circumstances or participants, establishing balancing payments and adjustments deemed necessary.
In accordance with Spanish regulations and transfer pricing guidelines, CCA must include a series of specific data so that they have a correct structure.
Therefore, since cost contributions arrangements are the starting point for many transactions, it is important that they include all the requirements, in accordance with local and international standards.