Tax officials at a June 6 OECD consultation suggested that draft guidance on cost contribution arrangements (CCAs) will be modified to clarify how to value CCA contributions. Officials also requested stakeholder feedback to help refine aspects of draft guidance on transfer pricing for hard-to-value intangibles.
The consultation concerned two discussion drafts proposing to modify OECD transfer pricing guidelines prepared by Working Party No. 6 (WP6) of the OECD’s Committee on Fiscal Affairs. The drafts were prepared in response to action 8 of the OECD/G20 base erosion and profit shifting action plan.
US delegate and WP6 co-chair Michael McDonald said the draft on CCAs, released April 29, will need to be changed regarding the valuation of contributions, an area of the draft which has received significant criticism from business.
“We are clearly hearing that ongoing contributions [to a CCA] need to be measured at cost for administrative or other reasons,” McDonald acknowledged, adding that it “makes sense” to make this change.
At the same time, though, there is also “a recognition that preexising contributions need to be measured at value,” McDonald maintained. Value should be used to measure contributions of items such as the preexisiting commitment of an R&D workforce to participate in the CSA, he said.
“We need to account for the fact that the contribution of your very valuable research staff has higher opportunity cost than my contribution of cash,” he said.
US delegate Christopher Bello noted that if services contributed to a CSA have high value, a cost plus method would not be an appropriate valuation method; rather, taxpayers should use “a method more appropriate for determining the price of IP.”
Bello, who is Branch Chief (Branch 6) at the US IRS, also noted that OECD guidance on low-value-adding intra-group services could be used to determine valuation in many instances.
Caroline Silberztein, who spoke for the International Alliance of Principled Taxation, a group of about two dozen multinationals, said that the draft can be read to require a valuation of R&D in an amount equal to the ultimate value of the to-be-developed intangible derived from the R&D. McDonald said that this was not intended, and that clarifications will be made to the draft.
Hard-to-value intangibles
Andrew Hickman, who heads transfer pricing at the OECD Centre for Tax Policy and Administration, said that stakeholder comments would still be appreciated to assist with revisions being considered to the OECD draft on hard-to-value intangibles, released June 4.
Hickman said that WP6 is considering providing an exemption in the hard-to-value intangibles guidance for “some variation amount.” WP6 would appreciate ideas on what the variation would be applied to; namely, should it be the difference between projections and outcome, differences in the expected profit, differences in the result of the pricing arrangements, or some other measure, he asked.
Hickman also said that WP6 expects that the hard-to-value intangibles rules could apply to the valuation of preexisting contributions under the CCA rules. He asked for confirmation that this is an appropriate conclusion.
He also said that WP6 would appreciate feedback on what further work is needed to implement of the hard-to-value intangibles approach.
Bello asked whether it is a good idea to apply the hard-to-value intangibles rules to all intangibles. “I think that would make sense,” he said.
He said that although WP6 has been leaning toward having the rules apply only in limited situations, that does not have to be the outcome of the project.
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