intra-group services cost contribution arrangements · low value-adding intra-group services cost...
TRANSCRIPT
Intra-group Services / Cost Contribution Arrangements 2
Agenda
BEPS – aligning transfer pricing outcomes
with value creation
Low value-adding intra-group services
Cost contribution arrangements
Intra-group Services / Cost Contribution Arrangements 3
BEPS – aligning transfer pricing outcome with value creation
BEPS
Coherence Substance Transparency
Action 8 – 10
aligning
transfer pricing
outcomes with
value creation
Risk Intangibles Base Erosion
Intra-group servicesCost contribution
arrangement
Intra-group Services / Cost Contribution Arrangements 4
Agenda
BEPS – aligning transfer pricing outcomes with
value creation
Low value-adding intra-group services
Cost contribution arrangements
Intra-group Services / Cost Contribution Arrangements 5
Main issues of intra-group services
HOLGmbH
SUBOOD
GER BGR
Intra-group Service
Service Fee
Price?Benefit test? Service? Base erosion?
Intra-group Services / Cost Contribution Arrangements 6
Determining whether intra-group services have been rendered
Benefit test?
Service?
In general do not
create intra-group
services
In general create
intra-group
services
Administrative services such as
planning, coordination, budgetary
control, financial advice, accounting,
auditing, legal, factoring, computer
services;
financial services such as
supervision of cash flows and
solvency, capital increases, loan
contracts, management of interest
and exchange rate risks, and
refinancing;
assistance in the areas of
production, buying, distribution and
marketing;
services in staff matters such as
recruitment and training;
group service centres executing
orders management, customer
service and call centres, research
and development or administration
and production of intangible
property.
Economic or
commercial value?
Willing to pay for
activity or perform
activity in-house?
Centralised
services
Shareholder
activity
Incidental benefits
Costs relating to juridical structure
of the parent company
(shareholder meetings, issuing
shares in the parent company,
stock exchange listing of the
parent company etc.);
costs relating to reporting
requirements (financial reporting
and auditing of the parent
company, especially consolidated
financial statements);
costs of raising funds for the
acquisition of its participations
and costs relating to the parent
company‘s investor relations;
costs relating to the compliance of
the parent company with the
relevant tax laws;
costs which are ancillary to the
corporate governance of the MNE
as a whole.
Duplications
Intra-group Services / Cost Contribution Arrangements 7
Identifying actual arrangements
Direct
Charge
Indirect
ChargeHOL
GmbH
SUB1OOD
GERBGR
SUB2s.r.o.
SUB3Spzoo
CZE
POL
Intra-group Service
Service Fee
Convenience for tax
administrations since
services performed and
basis for payments can be
clearly identified.
Risk of double taxation
since services performed
and basis for payments
can not be clearly
identified.
Not acceptable where
service is part of main
business activity.
Benefit of service cannot
be quantified accurately.
Challenge of finding a
proper allocation key.
HOLGmbH
SUBOOD
GER BGR
Intra-group Service
Service Fee
Intra-group Services / Cost Contribution Arrangements 8
Calculating the arm‘s length compensation
Costs BenefitPrice Range
Cost-based method
(CPM / TNMM)CUP
Determination of
cost base
Determination of
mark-up
Different cost levels
Determination of
expected benefit
Determination of
alternative costs
Recognition of profit elements
Debt-factoring activities Contract manufacturing Contract research
HOLGmbH
SUBOOD
GER BGR
Intra-group Service
Service Fee
Examples of intra-group services
Intra-group Services / Cost Contribution Arrangements 9
Low value-adding intra-group services
Low value-adding services
Not part of core business
Supportive nature
No use or creation of intangibles
No assumption, control or creation
of significant risk
Services constituting the core
business of the MNE Group;
research and development services;
manufacturing and production
services;
purchasing activities relating to raw
materials or other materials that are
used in the manufacturing or
production process;
sales, marketing and distribution
activities;
financial transactions;
extraction, exploration, or processing
of natural resources;
insurance and reinsurance;
services of corporate senior
management (other than management
supervision of services that qualify as
low value-adding services.
Accounting and auditing;
processing and management of
accounts receivable and accounts
payable;
human resources activities (staffing and
recruitment, training and employee
development, remuneration services,
developing and monitoring of staff health
procedures etc.);
information technology services
(installing, maintaining and updating IT
systems, information system support,
training on the use of application etc.);
internal and external communications
and public relations support;
legal services;
activities with regard to tax obligations;
general services of an administrative or
clerical nature.
Intra-group Services / Cost Contribution Arrangements 10
Simplified determination of an arm’s length charge
Introduction of elective, simplified approach for low value-adding services
Reducing tax compliance costs Reducing risk of double taxation Reducing tax enforcement costs
Benefit test
Benefit test only based
on a category of
services, not on a
specific charge basis
Determination
of cost pools
+ Direct cost
+ Indirect cost
+ Operating expense
./. Cost from
shareholder activity
Remove „one on one“
costs
Allocation of costs
Allocation key should
depend on nature of
service and reflect
share of benefit
expected.
Examples:
People: headcount
IT: user
Accounting:
transactions
Profit mark-up
Same mark-up
irrespective of
category of service
Mark-up shall be equal
to 5%
No need for
benchmark study
Documentation
Description of
categories and
qualification as low
value-adding service
Identification of
beneficiaries
Rationale of provision
and description of
benefit
Adequateness of
allocation key
Written contract
Calculation showing
cost, mark-up,
allocation key
Intra-group Services / Cost Contribution Arrangements 11
Practical challenges applying the simplified approach
Introduction of elective, simplified approach for low value-adding services
Reducing tax compliance costs Reducing risk of double taxation Reducing tax enforcement costs
Benefit testDetermination
of cost poolsAllocation of costs Profit mark-up Documentation
When should
operating expense be
included in the cost
basis?
How are different cost
levels taken into
account?
Is the profit mark-up
limited by the
expected benefit?
Reduction of tax
compliance costs if no
benchmark study is
needed.
Simplification vs.
arm’s length profit
allocation?
No documentation of
specific individual acts
undertaken necessary.
How detailed must the
description of the
benefit be?
How detailed must the
description of the
applicability of the
allocation key be?
How are “one to one”
costs determind?
Should location
specific cost
advantages be
reflected in mark-up?
Intra-group Services / Cost Contribution Arrangements 12
Overview simplified approach
Low value-adding
intra-group service?
(Simplified) Benefit
test satisfied?
Documentation
prepared?
Threshold exceeded?
Application of
simplified
approach
No application of
simplified approach
No
No
No
Yes
Yes
Yes
No
Simplified determination
of arm´s length charges:
Step 1: calculation of
all costs
Step 2: remove „one on
one“ costs
Step 3: allocation
Step 4: mark-up
Step 5: determination
of charge
As long as the rules
for documentation
and reporting are
satisfied, the benefit
test is deemed to be
satisfied in respect
of the simplified
approach.
Review of the
simplified
approach
Yes
Intra-group Services / Cost Contribution Arrangements 13
Agenda
BEPS – aligning transfer pricing outcomes with
value creation
Low value-adding intra-group services
Cost contribution arrangements
Intra-group Services / Cost Contribution Arrangements 14
Main issues of cost contribution arrangements
HOLGmbH
SUBOOD
GER BGR
Contribution
Benefit
Idea of a CCA
Profit shifting?
CCA
Participants
share contributions
and risks
to joint development,
production or
obtaining of
intangibles, tangible
assets or services
which create benefit
for the participants
Assumption of a CCA
Participant’s
proportionate share
of overall
contributions
must be consistent with
proportionate share
of overall benefit,
Transfer pricing
analysis is based on
actual transaction and if
no deviation on
contractual
arrangements.
150 250
200 200
PS PS
Profit shifting
PS
Proportionate
share
PS
200PS
200PS
Intra-group Services / Cost Contribution Arrangements 15
Typs of cost contribution arrangements
HOLGmbH
SUBOOD
GER BGR
Contribution
Benefit
Development CCA
CCA
Joint development,
production or obtaining
of intangibles, tangible
assets
Ongoing future benefits
Risk associated with
uncertain distant benefits
Greater complexity
regarding valuation of
contribution
(Chapter I-III, VI)
Service CCA
Joint obtaining of
services
Current benefits
More certain and less
risky benefits
Less complexity
regarding valuation of
contribution
Intra-group Services / Cost Contribution Arrangements 16
Participants of cost contribution arrangements
HOLGmbH
SUBOOD
GER BGR
Contribution
Benefit
Mutual benefit
CCA
No participation:
party makes no or very little contribution
party has no expected benefit
party only performs services
party does not exercise control over the
specific risk assumed under the CCA
party does not have the financial capacity
to assumed risks
party does not have capability to make
decisions or does not perform that
decision-making function
Intra-group Services / Cost Contribution Arrangements 17
Expected benefit from cost contribution arrangements
HOLGmbH
SUBOOD
GER BGR
Contribution
Benefit
CCA
Income generated or
costs saved
Projection of expected
benefit
Relevant allocation key
HOLGmbH
SUBOOD
CCA
200
200
Ben
efit: 4
00
Total benefit
Service CCA Development CCA
projected vs. actual
benefit
Multiple activity and
multiple allocation key
Intra-group Services / Cost Contribution Arrangements 18
Value of contribution to cost contribution arrangements
HOLGmbH
SUBOOD
GER BGR
Contribution
Benefit
CCA
Total contribution
Services
Current contributions
Valuation according to arm’s length principle
Pre-existing
intangibles
Activity: R&D,
etc.Valuation based on value of
functions performed (Cost-
based approach in exceptional
cases)
Pre-existing contributions
Valuation based on expected
value of benefit (e.g.
Intangible)
HOLGmbH
SUBOOD
CCA
200
200
Ben
efit: 4
00
100
250
Co
ntrib
utio
n: 3
00
Value of contribution is assessed based on value at the time
they are contributed bearing in mind the sharing of risk and the
nature and extent of expected benefit
Risk
Value of
Contribution
Value of
Benefit
=
Intra-group Services / Cost Contribution Arrangements
250
19
Value of contribution to cost contribution arrangements
HOLGmbH
SUBOOD
GER BGR
Contribution
Benefit
Balancing Payment
Through the balancing payment,
the proportionate share the of overall contributions
is consistent with proportionate share of overall
benefit and
the CAA is consistent with the arm’s length
principle.
Consistency of overall contribution to overall
expected benefit (generally no adjustments based on
the results of a single fiscal year). HOLGmbH
SUBOOD
CCA
200
200
50
50
Balancing
payment
CCABalancing
payment
Balancing payment vs. service provided
Ben
efit: 4
00
Co
ntrib
utio
n: 3
00
100
Intra-group Services / Cost Contribution Arrangements 20
Entry, withdrawal, termination
HOLGmbH
SUBOOD
GER BGR
Contribution
Benefit
CCABalancing
payment
Entry
Reassessment of proportionate shares of participants’ contribution and expected
benefit
Withdrawal
Party entering might
obtain an interest in any
results of prior CCA
(completed or work-in-
progress intangible)
Transfer part of respective
interest in results of prior
CCA: arm’s length buy-
in-payment
Party leaving might
transfer an interest in any
results of prior CCA
(completed or work-in-
progress intangible)
Transfer part of respective
interest in results of prior
CCA: arm’s length buy-
out-payment
Termination
Participant retains an
interest in the results of
the CCA consistent with
their proportionate share
of contributions
or
Participant is
appropriately
compensated for any
transfer of interest
Intra-group Services / Cost Contribution Arrangements 21
Conclusion regarding cost contribution arrangements
Recommendations for documenting
Participants: only enterprises expected to
derive mutual and proportionate benefits
from the CCA activity itself (not just from
performing part of or all of that activity),
nature and extent of each participant’s
interest in the results of the CCA and
expected respective share of benefit,
no payment other than the contributions,
appropriate balancing payments and buy-
in payments,
determination of value of participants’
contributions and balancing payments,
arrangement how to reflect material
changes in proportionate shares of
expected benefits among the participants,
adjustments necessary upon the entrance
or withdrawal of a participant and upon
termination of the CCA.
Recommendations for documenting
List of participants,
list of any other associated enterprises that will be
involved with the CCA,
scope of the activities and specific projects covered
and how the activities are managed and controlled,
duration of the arrangement,
determination of proportionate shares of expected
benefits,
exploitation of future benefits,
form and value of each participant’s initial
contributions,
anticipated allocation of responsibilities and tasks,
consequences of a participant entering, withdrawing
or terminating,
balancing payments to reflect changes in economic
circumstances,
changes to the arrangement,
comparison between projection of expected benefits
and actual share of benefit,
annual expenditure, form and value of contributions
and description of valuation of contributions.
Intra-group Services / Cost Contribution Arrangements 22
Practical challenges applying cost contribution arrangements
HOLGmbH
SUBOOD
GER BGR
Contribution
Benefit
CCABalancing
payment
Valuation of the expected
benefits within development
CCA.
Valuation of the contributions
to CCA.Determination of participants.
Determination of balancing
payments and buy-in / buy-
out-payments.
Intra-group Services / Cost Contribution Arrangements 23
Thank you very much for your attention
Peters, Schönberger & Partner
Rechtsanwälte Wirtschaftsprüfer
Steuerberater
Schackstraße 2
80539 Munich
Phone: +49 89 3 81 72 - 0
Fax: +49 89 3 81 72 - 204
Email: [email protected]
Internet: www.psp.eu
Speaker
Dr. Axel von Bredow, MBR