TEI comments on BEPS Action 8: CCAs.

• Position: Tax Executives Institute, base erosion and profit sharing, cost contribution arrangements

On May 28, 2015, TEI submitted comments on the OECD BEPS discussion draft Action 8: Revisions to Chapter VIII of the Transfer Pricing Guidelines on Cost Contribution Arrangements (CCAs). The Institute's comments focused on the OECD's new value-based approach to services contributed to a CCA as a departure from the OECD's current transfer pricing guidelines, along with the need for additional examples in the discussion draft, among other things. TEI's comments were prepared under the aegis of TEI's European Direct Tax Committee, whose chair is Nick Hasenoehrl. Benjamin R. Shreck, TEI Tax Counsel, coordinated the preparation of TEI's comments.

On July 19, 2013, the OECD published an Action Plan on Base Erosion and Profit Shifting (hereinafter the Action Plan or the Plan) setting forth 15 actions the OECD will undertake to address a series of issues that contribute to the perception that individual countries' tax bases are being eroded or profits shifted improperly. Pursuant to Action 8 of the Plan, on April 29, 2015, the OECD published a public discussion draft entitled BEPS Action 8: Revisions to Chapter VIII of the Transfer Pricing Guidelines on Cost Contribution Arrangements (CCAs) (hereinafter the Discussion Draft or Draft). The OECD solicited comments from interested parties no later than May 29, 2015. On behalf of Tax Executives Institute, Inc. (TEI), I am pleased to respond to the OECD's request for comments.

TEI Background

TEI was founded in 1944 to serve the needs of business tax professionals. Today, the organisation has fifty-six chapters in Europe, North and South America, and Asia. As the preeminent association of in-house tax professionals worldwide, TEI has a significant interest in promoting tax policy, as well as the fair and efficient administration of the tax laws, at all levels of government. Our nearly 7,000 individual members represent over 3,000 of the largest companies in the world. (1)

TEI Comments

Value of Contributions to CCAs

A focus of the Discussion Draft is the view that the proper "price" at which to measure a participant's contribution to a CCA is the value of the assets or services contributed, rather than their cost. (2) The Draft states that "contributions must generally be assessed based on their value (rather than their cost) in order to be consistent with the arm's length principle." (3) This is a departure from the existing OECD transfer pricing guidelines where actual costs incurred under a CCA or cost sharing arrangement were typically shared or allocated among the participants based on their proportionate expected future benefit. Moreover, in advancing the value approach the OECD appears to misapprehend to substance of CCAs. These arrangements are not intended to be service arrangements or ongoing sales or exchanges at value, but rather a sharing of risks. The fundamental risk is that the costs incurred will yield no future benefit--the same risk a party would undertake if it developed an intangible on its own outside of the CCA and licensed the preexisting intangibles it did not own.

The current OECD transfer pricing guidelines are more consistent with third party cost sharing arrangements where participants share in the actual costs incurred in return for expected future benefits. Participants often engage in cost sharing arrangements with one or more other parties to obtain access to expertise or cost efficiencies that they might not possess. If a participant must pay a higher hypothetical value, it erodes the benefit of the cost sharing arrangement and the arrangement's business rationale. Moreover, cost sharing arrangements are often used for "hard to value intangibles" where comparables are not readily available; pricing these at their arm's length value will substantially increase complexity and likely result in increased disputes with tax authorities.

Further, the Discussion Draft suggests transactions within a CCA should be compared to transactions outside of a CCA. In TEI's view, the Draft does not recognise that the risks that CCA participants assume are not necessarily those that would have been agreed upon by the participants in the absence of a CCA. As noted, the assumption of risk is a key differentiator for participants in cost sharing arrangements versus other contractual arrangements. As such, transactions within a CCA are not necessarily comparable with transactions not covered by a CCA, as there will be differences in shared risks and activities, mutual cooperation, and assets owned. At the very least, in line with Chapter I of the OECD transfer pricing guidelines, the Discussion Draft needs to consider adjustments to reflect differences in CCA functional and risk profiles and asset ownership.

That said, TEI acknowledges that contributions of assets, such as pre-existing intangibles, should generally be measured at fair market value. However, this should not necessarily be the case for ongoing contributions of services, even for development CCAs. With respect to performing the actual research and development work, it would be...