The expectation of mutual and proportionate benefit is fundamental to the acceptance by independent enterprises of an arrangement for sharing the consequences of risks materialising and pooling resources and skills. Independent enterprises would require that the value of each participant’s proportionate share of the actual overall contributions to the arrangement is consistent with the participant’s proportionate share of the overall expected benefits to be received under the arrangement. To apply the arm’s length principle to a CCA, it is therefore a necessary precondition that all the parties to the arrangement have a reasonable expectation of benefit. The next step is to calculate the value of each participant’s contribution to the joint activity, and finally to determine whether the allocation of CCA contributions (as adjusted for any balancing payments made among participants) accords with their respective share of expected benefits. It should be recognised that these determinations are likely to bear a degree of uncertainty, particularly in relation to development CCAs. The potential exists for contributions to be allocated among CCA participants so as to result in an overstatement of taxable profits in some countries and the understatement of taxable profits in others, measured against the arm’s length principle. For that reason, taxpayers should be prepared to substantiate the basis of their claim with respect to the CCA (see Section E).
TPG2022 Chapter VIII paragraph 8.13
Category: C. Applying the arm’s length principle | Tag: Balancing payments, CCA/CSA, Expected mutual and proportionate benefit, Value of each participant’s contribution
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- TPG2022 Chapter VIII paragraph 8.35Balancing payments may be made by participants to “top up” the value of the contributions when their proportionate contributions are lower than their proportionate expected benefits. Such adjustments may be anticipated by the participants upon entering into the CCA, or may be the...
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- TPG2022 Chapter VIII paragraph 8.51The transfer pricing documentation standard set out in Chapter V requires reporting under the master file of important service arrangements and important agreements related to intangibles, including CCAs. The local file requires transactional information including a description of the transactions, the amounts of...
- TPG2022 Chapter VIII paragraph 8.40As indicated in paragraph 8.33, the guidance in Chapter VI on hard-to-value intangibles may equally apply in situations involving CCAs. This will be the case if the objective of the CCA is to develop a new intangible that is hard to value at...
- TPG2022 Chapter VIII paragraph 8.36Balancing payments may also be required by tax administrations where the value of a participant’s proportionate contributions of property or services at the time the contribution was made has been incorrectly determined, or where the participants’ proportionate expected benefits have been incorrectly assessed,...
- TPG2022 Chapter VIII paragraph 8.38In the example in paragraph 8.33, the participants, Companies A and B, expect to benefit from the CCA in the ratio 75:25. In the first year the value of their pre-existing contributions is 10 million for Company A and 6 million for Company...
- TPG2022 Chapter VIII paragraph 8.14Because the concept of mutual benefit is fundamental to a CCA, it follows that a party may not be considered a participant if the party does not have a reasonable expectation that it will benefit from the objectives of the CCA activity itself...
- TPG2022 Chapter VIII paragraph 8.6Some benefits of the CCA activity can be determined in advance, whereas others will be uncertain. Some types of CCA activities will produce current benefits, while others have a longer time frame or may not be successful. Nevertheless, in a CCA there is...
- June 2019: IRS Transfer Pricing Examination Process – Risk AssessmentThe report on Transfer Pricing Examination Process (TPEP) provides a framework and guide for transfer pricing examinations. The guide will be updated regularly by the IRS based on feedback from examiners, taxpayers, practitioners and others. ...
Related Case Law
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