COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE on the work of the EU Joint Transfer Pricing Forum in the period July 2010 to June 2012 and related proposals 1. Report on Small and Medium Enterprises and Transfer Pricing and 2. Report on Cost Contribution Arrangements on Services not creating Intangible Property (IP)
Date: 2012-09-19
Institutions: European Commission
Subjects: financial legislation, free competition, small and medium-sized enterprises, tax system, transfer pricing

EUROPEAN COMMISSION 

Brussels, 19.9.2012  
COM(2012) 516 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL AND THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE 

on the work of the EU Joint Transfer Pricing Forum  
in the period July 2010 to June 2012 and related proposals 
1. Report on Small and Medium Enterprises and Transfer Pricing and 
2. Report on Cost Contribution Arrangements on Services not creating Intangible 
Property (IP) 

EN 

   EN 

 
 
 
  
 
COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL AND THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE 

on the work of the EU Joint Transfer Pricing Forum  
in the period July 2010 to June 2012 and related proposals 
1. Report on Small and Medium Enterprises and Transfer Pricing and 
2. Report on Cost Contribution Arrangements on Services not creating Intangible 
Property (IP) 

1. 

INTRODUCTION 

It is commonly accepted that increased globalization gives rise to practical problems 
for  both  multinational  enterprises  (MNEs)  and  tax  administrations  (TA)  when 
pricing,  for  tax  purposes,  cross-border  transactions  between  associated  enterprises. 
The  approach  adopted  by  European  Union  (EU)  Member  States  (MS)  to  correctly 
evaluate  the  price  of  such  transactions  is  that  of  the  arm's  length  principle  (ALP)1. 
The  ALP  is  based  on  a  comparison  between  the  conditions  applied  by  associated 
enterprises  and  the  conditions  that  would  have  applied  between  independent 
enterprises. 

However, the interpretation and application of the ALP does vary between both tax 
administrations and tax administrations and business. This can result in uncertainty, 
increased  costs  and  potential  double  taxation  or  even  non  taxation.  These  impact 
negatively on the smooth functioning of the internal market. 

To address this, the EU Joint Transfer Pricing Forum (JTPF), an expert group, was 
set up by the Commission in October 20022, to find pragmatic solutions to problems 
arising  from  the  application  of  the  ALP,  in  particular  within  the  EU.  In  2011,  the 
mandate  of  the  JTPF  was  renewed  and  extended  until  31  March  2015  by  way  of  a 
Commission decision3.  

This  Communication  reports  on  the  work  of  the  JTPF  for  the  period  July  2010  to 
June 2012 and draws conclusions on the future work of the expert group. 

2. 

SUMMARY OF ACTIVITIES OF THE EU JOINT TRANSFER PRICING FORUM  

In the period July 2010 to June 2012, the JTPF met six times. Detailed reports were 
completed on two subjects. One addresses specific considerations on transfer pricing 
for small and medium enterprises in the EU and the other addresses a particular intra 
group arrangement known as a cost contribution arrangement. Monitoring exercises 
to  gauge  the  level  of  implementation  of  previous  JTPF  initiatives  were  also 
completed. Following its renewed mandate, the Forum agreed in June 2011 updated 
Rules of Procedure and a new work programme 2011-2015. Discussions commenced 

1 

2 

3 

The arm's length principle is set forth in Article 9 of the Organisation for Economic Co-operation and 
Development (OECD) Model Tax Convention. OECD has also developed Transfer Pricing Guidelines 
for Multinational Enterprises and Tax Administrations. 
Communication from the Commission to the Council, the European Parliament and the Economic and 
Social Committee: ‘Towards an internal market without obstacles — A strategy for providing 
companies with a consolidated corporate tax base for their EU-wide activities’ COM (2001) 582 final, 
23.10.2001, p. 21. 
Decision 2011/C 24/03 of 25 January 2011 (OJ C 24, 26.1.2011, p. 3-4). 

 
 
                                                            
in  the  period,  but  yet  not  concluded,  cover  the  following  topics  from  the  work 
program: risk based approaches to transfer pricing, issues related to double taxation 
resulting from secondary adjustments, and compensating/year-end adjustments. The 
JTPF  will  continue  addressing  these  issues,  together  with  monitoring,  in  the 
forthcoming meetings. 

2.1. 

JTPF conclusions on small and medium enterprises and transfer pricing  

A  general  feature  of  transfer  pricing  is  the  administrative  burden  it  creates  for 
taxpayers  and  tax  administrations.  Small  and  medium  enterprises  (SMEs)  face 
particular difficulties as a result of their lack of knowledge, experience of the subject 
and resource availability. Tax administrations also face challenges when dealing with 
SMEs as they need to strike a balance between applying their tax policy in an even 
handed  manner  taking  into  account  available  own  resources  and  cost  benefit 
considerations  and  avoiding  undue  administrative  burden  and  unnecessary  tax 
conflicts for SMEs and among tax administrations. 

Recognising  the  central  role  of  SMEs  in  the  EU  economy,  the  JTPF  undertook  an 
effort to examine the challenges and present proposals to improve - from a transfer 
pricing  perspective  -  the  environment  in  which  SMEs  operate.  Although  transfer 
pricing  is  not  an  issue  for  a  huge  proportion  of  SMEs,  the  absolute  number  of 
undertakings thus concerned may be quite high. 

The report gives various recommendations for a more uniform way to consider the 
specific  requirements  for  SMEs  in  the  context  of  transfer  pricing.  It  addresses  the 
different stages of SME's compliance with transfer pricing.  

In relation to the definition of SME, the report clarifies that its aim is not to agree on 
a common definition of SMEs for tax purposes. However, it recommends that MSs 
build  on  the  criteria  already  used  in  Commission  Recommendation  2003/361/EC4 
(balance sheet total, turnover, number of employees) when considering how to define 
an SME.  

Regarding compliance with transfer pricing rules, the report contains best practices 
and recommended guidelines with respect to pre-audit, audit and dispute resolution. 
It supports the principle of proportionality as a sound approach when considering the 
needs of SMEs, the requirements of tax administrations and the ability of SMEs to 
meet these requirements.  

For  the  pre-audit  stage  the  report  recommends  ensuring  an  information  point 
accessible for SMEs and raising SMEs' awareness of processes that provide certainty 
in advance. Further it invites MS to develop simplification measures to reduce SMEs 
compliance burden. For the audit stage the report recommends considering pragmatic 
solutions which may be based on other MS experiences and previous JTPF reports. 
When  SMEs  are  audited,  they  should  receive  appropriate  treatment.  In  the  area  of 
dispute resolutions the report recommends encouraging fast track dispute resolution 
for non-complex low value SME claims and to exploring and implementing auditor 
to auditor contact in the framework of Mutual Agreement Procedures (MAP) and the 
so-called Arbitration Convention (AC)5.  

4  

5  

Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-
sized enterprises, OJ L 124, 20.5.2003, p. 36. 
Convention on the elimination of double taxation in connection with the adjustment of profits of 
associated enterprises, OJ L 225, 20.8.1990, p. 10. 

 
 
                                                            
The  report  concludes  by  recognising  SMEs'  particular  needs  as  regards  complying 
with  transfer  pricing  rules.  It  concludes  that  its  findings  and  recommendations  rely 
on  the  application  of  proportionality  backed  by  a  flexible  implementation  of  that 
principle.  Monitoring  the  effects  of  the  measures  recommended  by  the  report  and 
implemented by MS when dealing with SMEs will be a future action for the JTPF. 

2.2. 

JTPF conclusions on Cost Contribution Arrangements on services not creating 
Intangible Property (IP) 

Cost Contribution Arrangements (CCAs) on services are commonly used as a cost-
effective means for MNEs to carry out the group's activities. The business decision to 
have  recourse  to  a  CCA  can  be  justified  by  various  reasons,  e.g.  reasons  of 
economies of scale, sharing of risks, skills or resources. To avoid duplication of the 
work  currently  undertaken  by  the  OECD  on  transfer  pricing  aspects  of  intangibles, 
the JTPF's work focusses on CCAs on services not creating Intangible Property (IP).  

The  report  first  elaborates  on  the  different  concepts  underlying  CCAs  and  Intra 
Group  Services  (IGS).  The  emphasis  of  the  report  is  on  how  most  expediently  a 
reviewer  can  conclude  that  the  ALP  has  been  applied  to  CCAs  on  services  not 
creating IP. 

For  this  purpose  the  report  presents  the  general  features  for  determining  whether  a 
CCA  is  consistent  with  the  ALP.  It  also  provides  a  list  of  information  items  that 
should meet the requirements of most reviewers when determining whether a CCA 
can be regarded as arm's length.  

Certain  aspects  are  addressed  more  specifically  as  e.g.  the  expected  benefit  test, 
allocation  keys  that  may  be  used  for  determining  each  participant's  contribution, 
ways to measure contributions in kind, the treatment of cases where costs referred to 
are those initially budgeted rather than those actually incurred, as well the possible 
application of accounting standards generally used throughout the group.  

The  importance  of  the  report  regarding  CCAs  on  services  not  creating  intangible 
property  is  increased  by  the  fact  that  it  supplements  the  existing  guidance  on  low 
value adding intra group services (JTPF IGS Guidelines) and completes the JTPF’s 
work on intra group services.  

The  report  concludes  that  compliance  with  its  recommendations,  in  most  cases 
falling  within  its  scope,  will  facilitate  the  evaluation  and  make  it  easier  for  tax 
administrations  to  accept  that  the  ALP  has  effectively  been  applied.  The  JTPF  will 
monitor the effect of these guidelines regularly. 

2.3. 

Update on the items of the work programme 

During  the  period  covered  by  this  Report,  the  JTPF  has  addressed  the  remaining 
topics  in  the  previous  2007-2011  work  programme,  and  adopted  in  June  2011  the 
new 2011-2015 work programme, which forms the basis of the current JTPF work. 
From July 2010 to June 2011 the JTPF's activity concentrated mainly on SMEs and 
transfer pricing. The report was adopted by the Forum in March 20116. 

Carried  over  from  the  previous  work  programme,  the  first  item  of  the  2011-2015 
work  programme  was  the  development  of  a  common  approach  on  CCAs.  This 
project,  covering  CCAs  on  services  not  creating  IP,  was  successfully  completed  in 
June 20127.  

6 
7 

Appendix I 
Appendix II 

 
 
                                                            
On risk assessment, an important factor of transfer pricing policy which allows both 
tax  administrations  and  taxpayers  to  maximize  the  effective  use  of  their  limited 
resources,  presentations  made  by  several  members  of  the  Forum  (both  MS  and  the 
Private  Sector)  will  be  the  basis  for  future  work.  The  group  will  analyse  best 
practices in order to decide on the potential scope of EU guidance in this respect.  

With  respect  to  the  acceptance  of  compensating/year-end  adjustments,  there  are 
differing  practices  within  the  EU.  A  questionnaire  was  launched  in  2011  and 
completed in 2012. This overview already constitutes the accomplishment of a part 
of the work programme. The JTPF will further analyse whether a common approach 
on compensating adjustments can be developed within the EU.  

In  some  MS,  a  transfer  pricing  adjustment  is  accompanied  by  an  additional 
adjustment. These so- called "secondary adjustments" may result in double taxation 
and  were  therefore  included  in  the  JTPFs  work  programme.  A  questionnaire  was 
launched  in  2011  and  completed  in  2012.  Although  this  state  of  play  already 
constitutes  the  accomplishment  of  a  part  of  the  work  programme,  the  JTPF  is 
analysing  the  effects  of  secondary  adjustments  in  the  EU  in  order  to  propose 
solutions  to  improve  the  present  situation,  both  in  relation  to  potential  double 
taxation and to some practical aspects of its application. 

2.4.  Monitoring activity 

An ongoing task of the JTPF is to monitor and manage the effective implementation 
of its achievements. This is done both by producing annual statistical reports and by 
preparing  specific  reports.  The  reports  are  then  examined  by  the  Commission 
Services and the JTPF to identify where further work by the JTPF could be carried 
out.  

Statistical  reports  with  respect  to  pending  cases  under  the  AC  and  on  Advanced 
Pricing  Agreements  (APAs)  are  prepared  and  evaluated  annually.  The  format  of 
these  statistical  reports  was  improved  and  will  be  reviewed  again  in  the  future. 
Further  additional  guidance  for  completing  the  annual  APA  questionnaire  was 
developed. 

As  the  JTPF  has  been  in  place  for  10  years,  a  broader  monitoring  exercise  of  its 
achievements  will  be  carried  out.  The  Codes  of  Conduct  on  the  effective 
implementation  of  the  AC  and  on  transfer  pricing  documentation  in  the  EU,  the 
Guidelines  on  APAs  in  the  EU  as  well  as  the  Guidance  for  low  value  adding  intra 
group  services  will  be  reviewed  together.  The  aim  is  to  evaluate  the  overall 
effectiveness of the implementation of JTPF recommendations endorsed by MS, and 
to consider how improvements might be made. 

3. 

COMMISSION CONCLUSIONS 

The Commission continues to regard the JTPF expert group as a valuable resource in 
addressing  transfer  pricing  issues  and  providing  pragmatic  solutions  to  a  variety  of 
such issues.  

In particular the Commission notes that the report on Small and Medium Enterprises 
and  Transfer  Pricing  as  well  as  the  report  on  CCAs  on  Services  not  creating  IP, 
address key tasks identified by the Commission when setting up the JTPF, that is to 
achieve  a  more  uniform  application  of  transfer  pricing  rules  within  the  European 
Union.  

 
 
The  Commission  fully  supports  the  conclusions  and  suggestions  of  the  reports  in 
Appendix  I:  Report  on  Small  and  Medium  Enterprises  and  Transfer  Pricing  and  in 
Appendix II: Report on CCAs on Services not creating Intangible Property (IP).  

The  Commission  invites  the  Council  to  endorse  the  proposed  Report  on  small  and 
medium  enterprises  and  transfer  pricing  and  invites  Member  States  to  implement 
practices that are in line with the approaches and procedural considerations contained 
in the Report in their national legislation or administrative rules. 

The  Commission  invites  the  Council  to  endorse  the  proposed  Report  on  CCAs  on 
services  not  creating  Intangible  Property  (IP)  and  invites  Member  States  to 
implement  quickly  the  recommendations  included  in  the  Report  in  their  national 
legislation or administrative rules. 

The  Commission  believes  that  a  future  periodical  monitoring  exercise  on  the 
implementation of the reports' conclusions and recommendations and its functioning 
will provide useful feedback to inform any necessary updating exercise. 

In  this  context,  the  Commission  encourages  the  JTPF  to  continue  its  monitoring 
activity  and  looks  forward  to  the  outcome  of  the  JTPF  current  work  programme 
items  on  risk  assessment,  secondary  adjustments  and  compensating/year-end 
adjustments. 

 
 
APPENDIX I 
REPORT ON SMALL AND MEDIUM ENTERPRISES AND TRANSFER PRICING 

I. 

1. 

II. 

2. 

3. 

4. 

5. 

6. 

8 

Introduction 

The  Joint  Transfer  Pricing  Forum  (JTPF),  as  part  of  its  agreed  work  programme, 
considered the impact of transfer pricing on Small and Medium Enterprises (SMEs). 
The  JTPF  background  discussion  papers  on  this  work  may  be  found  on  the  DG 
Taxation and Customs Union website including contributions from The Federation of 
European  Accountants  and  Conféderation  Fiscale  Européenne.  This  report  is  the 
outcome of that work. 

Background 

There  are  around  23  million  SMEs  in  the  EU  representing  99.8%  of  all  European 
enterprises.  About  5%  of  those  SMEs  have  associated  companies  where  transfer 
pricing may be in point.8 These figures indicate that transfer pricing is not an issue 
for  a  huge  proportion  of  SMEs  but  the  absolute  number  of  undertakings  thus 
concerned  may  be  quite  high.  But,  where  transfer  pricing  is  in  point,  SMEs  face 
difficulties  as  a  result  of  their  lack  of  knowledge,  experience  of  the  subject  and 
resource  availability.  The  low  figure  of  international  intra-group  trading  at  SME 
level may also reflect that those same difficulties can impede SMEs from engaging in 
intra-group cross border trading. 

Tax administrations also face challenges when dealing with SMEs. Administrations 
need to strike a balance between applying their tax policy in an even handed manner 
taking  into  account  available  own  resources  and  cost  benefit  considerations  and 
avoiding  undue  administrative  burden  and  unnecessary  tax  conflicts  for  SMEs  and 
among  tax  administrations.  Within  the  EU  there  is  neither  a  common  definition  of 
SMEs  for  general  tax  purposes  or  specifically  for  transfer  pricing,  nor  a  common 
treatment of SMEs. 

Some  tax  administrations  already  have  specific  SME  transfer  pricing  measures  in 
place.  Those  measures  can  be  broadly  categorised  as  an  overall  policy  approach  or 
specific  administrative  actions.  An  example  of  a  policy  approach  is  that  of 
proportionality.  This  approach  revolves  around  balancing  compliance  requirements 
with the SME resources available to meet that compliance requirement. An example 
of  an  administrative  action  is  a  more  slim  line  transfer  pricing  documentation 
requirement for SMEs than that for non– SMEs. 

The  perspective  of  Multinational  Enterprises  (MNEs)  is  that  they  and  SMEs  often 
complement each other in EU business operations and each has a vested interest in 
the  efficient  operation  of  the  other.  But  non-SMEs  also  want  to  maintain  an 
appropriate 'level playing field' and not be disadvantaged as a result of responses by 
tax administrations to the needs of SMEs. 

Business recognises that issues like management time and expert tax advisers' costs 
can cause SMEs to refrain from accessing expert services. 

2009 Annual Report on European SMEs (http://ec.europa.eu/enterprise/policies/sme/facts-figures-
analysis/performance-review/files/supporting-documents/2009/annual-report_en.pdf, page 15). 

 
 
 
 
                                                            
7. 

III. 

8. 

9. 

10. 

11. 

12. 

The  JTPF  in  its  reports  on  transfer  pricing  documentation  and  Advance  Pricing 
Agreements  (APA)  guidelines  acknowledged  the  need  for  flexibility  when  dealing 
with  SMEs  and  transfer  pricing.  The  documentation  report  refers  to  applying  "a 
reasonableness test" and the APA guidelines to "facilitating access" where SMEs are 
involved. 

Defining an SME 

A  common  definition  of  an  SME  for  transfer  pricing  purposes  would  provide  an 
agreed  departure  point  in  facilitating  the  outcomes  and  recommendations  of  this 
report. A definition of SMEs is set out in Recommendation 2003/361/EC9 but is not 
widely  applied  for  direct  tax  purposes  by  tax  administrations.  The  JTPF  made  the 
following observations on the use of a definition. 

For small Member States applying a particular SME definition could result in even 
large  domestic  companies/groups  being  classified  as  SMEs.  Therefore,  special  care 
must be taken regarding the SME definition applied. 

A definitional approach can influence SME behaviours. It may be a disincentive for 
some  SMEs  to  grow  their  business  and  thereby  cross  a  defined  threshold  and 
potentially incur increased costs, administrative burden and lose access to incentives. 

Similarly,  some  Tax  administrations  feel  a  too  prescriptive  EU  SME  definition 
would not take sufficient account of the make-up of a particular tax administration's 
tax  base.  For  example,  if,  according  to  a  commonly  agreed  definition,  a  large 
proportion  of  a  Member  State's  tax  base  were  made  up  of  SMEs  that  may  pose 
different issues than if SMEs make up only a minority of a tax base. 

The definitions of SMEs currently used by tax administrations, either for direct tax 
purposes generally or for transfer pricing specifically, often 'borrow' from parts of the 
definition  set  out  in  Recommendation  2003/361/EC.  Criteria  used  within  the  EU 
include  the  following:  balance  sheet  value,  turnover,  and  numbers  of  employees; 
individual  or  cumulative 
transaction  values.  These  criteria  are  sometimes 
compounded  by  anti-abuse  rules.  The  criteria  may  or  may  not  be  applied  on  a 
consolidated basis – i.e. at group level. Where tax administrations have not published 
a  SME  definition,  either  for  the  purposes  of  a  general  definition  or  specifically  for 
transfer pricing, they are invited to consider using criteria already commonly in use. 

13. 

The Forum considers it useful to bring together in one place a description of EU tax 
administration's  SME  definitions  that  are  currently  in  place  either  for  direct  tax 
purposes generally, transfer pricing or both10.  

Recommendations: 

R1. If an EU tax administration is considering defining SMEs for direct tax purposes or 
more  specifically  for  transfer  pricing  purposes,  it  is  recommended  it  considers  using 
criteria  already  used  within  the  EU.  Such  an  approach  will  also  assist  in  reducing 
instances of asymmetry of treatment arising from differing SME definitions. 

9  
10  

OJ L 124, 20.5.2003, p. 36. 
See DOC: JTPF/001/ANNEX/2011/EN. 

 
 
 
                                                            
R2. The recommended criteria in current use consist of: balance sheet value, turnover, 
numbers of employees; individual or cumulative transaction values. It is recommended 
that all be measured on a consolidated basis, i.e. at group level. 

R3.  Definitions  currently  in  use  by  Member  States  should  be  brought  together  in  one 
place and updated regularly11.  

R4.  A  common  EU  tax  definition  of  SMEs  is  recommendable  and  would  provide  an 
agreed starting point in the implementation of the findings and recommendations of this 
report, but it is not realistic to reach a common agreement in the foreseeable future. 

IV. 

14. 

15. 

16. 

SMEs: compliance and transfer pricing 

In the EU transfer pricing compliance currently means adherence to the arm's length 
principle  in  line  with  Art  9  of  The  Organisation  for  Economic  Co-operation  and 
Development  (OECD)  Model  Tax  Convention.  The  arm's  length  principle  applies 
equally whatever the size of a MNE. However, the degree of difficulty in applying it 
may be greater for SMEs. The OECD Transfer Pricing Guidelines (“TPG”) contain 
explicit acknowledgement of this difficulty in several places. For instance, paragraph 
3.80  contains  a  specific  comment  in  relation  to  compliance  costs  for  SMEs.  The 
OECD at paragraph 3.83 of the TPG states that “Small to medium sized enterprises 
are  entering  into  the  area  of  transfer  pricing  and  the  number  of  cross-border 
transactions is ever increasing. Although the arm’s length principle applies equally to 
small  and  medium  sized  enterprises  and  transactions,  pragmatic  solutions  may  be 
appropriate in order to make it possible to find a reasonable response to each transfer 
pricing case. 

This  report  considers  what  best  practices  and  recommended  guidelines  can  be 
discerned from current compliance activity. A useful structure for that examination is 
to  consider  pre-audit,  audit  and  dispute  resolution  activities.  Inevitably  these  rather 
broad categories will have some overlap. 

A  recurrent  theme  in  tax  administrations  is  that  the  approach  to  SMEs  should  be 
proportionate to the requirements of the tax administration and the ability of SMEs to 
meet  those  requirements.  The  JTPF  supports  the  principle  of  proportionality  as  a 
sound approach to meeting the needs of SMEs. The JTPF also noted that an approach 
based on proportionality aligns itself well with the commentary on Chapter IV and V 
of the OECD guidelines. 

Recommendation: 

R5.  An  approach  based  on  proportionality  is  welcomed  by  the  JTPF.  It  seems 
particularly appropriate to balance a tax administration's need to even-handedly apply 
transfer  pricing  rules  with  the  burden  it  might  create  for  SMEs  when  complying  with 
those rules. 

Pre-Audit 

11  

See DOC: JTPF/001/ANNEX/2011/EN. 

 
 
 
 
                                                            
17. 

Tax administrations want to receive and taxpayers want to pay the right amount of 
tax  at  the  right  time.  Pre-audit  activity  is  possibly  the  most  effective  method  to 
enable taxpayers and tax administrations to achieve voluntary compliance – the most 
cost  effective  form  of  compliance.  That  objective  is  best  facilitated  by  good 
information, 
communication, 
supplemented by easily accessible specialist advice. Getting this interaction right has 
a  direct  impact  on  the  level  of  voluntary  compliance  and  the  level  of  compliance 
burden. 

the  provision  and  understanding  of 

relevant 

Tax administration and SME communication 

18. 

19. 

There  is  an  increasing  international  recognition12  that  enhancing  the  relationship 
between  a  tax  administration  and  its  corporate  taxpayers  by  means  of  an  ongoing 
dialogue  outside  an  audit  is  beneficial  to  both  parties.  Exchanges  will  be  less 
confrontational  and  promote  a  wider  and  better  understanding  of  each  other's 
perspectives. If an audit were launched, each of the parties would start from a more 
informed position. 

It is particularly difficult to build up a communication network with SMEs not least 
because of their limited resources. SME representative groups provide useful insight 
to  matters  of  concern  to  their  members.  What  seems  harder  to  establish  is  a  direct 
line of communication with frontline SMEs. Tax administrations are encouraged to 
seek  opportunities  to  work  with  individual  SMEs,  representative  groups  and 
professional  advisors  to  build  or  strengthen  a  local  communication  network  with 
SMEs.  For  example,  a  relatively  simple  action,  as  already  happens  in  some  tax 
administrations, is to organise technical workshops. A variety of SMEs are invited to 
attend to discuss and seek solutions to problem areas and identify best practice. Such 
events can also be used to consult SMEs on transfer pricing policy initiatives a tax 
administration may wish to introduce. 

Access to information 

20. 

21. 

The  breadth  and  depth  of  information  provided  to  assist  SMEs  to  comply  with 
transfer  pricing  rules  varies  between  tax  administrations.  It  would  be  beneficial  for 
both business and tax administrations to be able to access that information. Details of 
where 
in  DOC: 
information  can  currently  be  found  are  contained 
JTPF/001/ANNEX/2011/EN. 

that 

The  JTPF  proposes  that  the  information  provided  by  tax  administrations  for  this 
report is kept updated. Administrations should consider how best they can establish 
electronically accessible SME information perhaps either as a dedicated site or as an 
integrated  part  of  an  existing  site.  The  site(s)  would  detail  definitions  of  SMEs  - 
generally  and/or  for  transfer  pricing,  as  well  as  any  other  SME  transfer  pricing 
legislation,  administrative  practice  or  training  material.  In  addition  a  contact(s) 
address  for  further  enquiries  can  be  included.  The  web  pages  may  also  usefully 
include other non transfer pricing matters relating to SMEs. A list of those web pages 
will be held on the JTPF website. 

Training 

12 

The recent work of the OECD Forum on Tax Administration may be cited as an example. 

 
 
                                                            
22. 

The possibility of producing some sort of blue print transfer pricing training module 
for  SMEs  was  debated.  To  develop  this  suggestion  would  require  a  significant 
amount of the Forum's resource. Also it was not clear what the additional benefit the 
JTPF could add over locally produced material13. 

Certainty in advance of a transaction taking place 

23. 

24. 

25. 

26. 

27. 

28. 

SMEs often seek certainty that before executing a transaction it will comply with the 
transfer pricing rules but they may not be aware how that might be done. 

The  mechanism  generally  used  in  transfer  pricing  to  meet  this  need  is  an  Advance 
Pricing  Agreement.  The  process  determines  an  appropriate  set  of  criteria,  agreed 
between the tax administration and the taxpayer, to establish the transfer price of a 
future  transaction.  However,  APA  rules  may  contain  complexity  thresholds  or  fees 
that  make  the  process  inaccessible  or  at  least  less  accessible  to  SMEs.  As  stated  at 
paragraphs 4.158 and 4.163 of the OECD TPG, “the nature of APA proceedings may 
de facto limit their accessibility to large taxpayers. The restriction of APAs to large 
taxpayers may raise questions of equality and uniformity, since taxpayers in identical 
situations  should  not  be  treated  differently.  A  flexible  allocation  of  examination 
resources  may  alleviate  these  concerns.  Tax  administrations  also  may  need  to 
consider  the  possibility  of  adopting  a  streamlined  access  for  small  taxpayers.  Tax 
administrations should take care to adapt their levels of inquiry, in evaluating APAs, 
to  the  size  of  the  international  transactions  involved”.  The  JTPF  has  previously 
issued some guidelines on how best to approach the subject of accessibility and the 
guidelines  state:  Tax  administrations  should  use  their  experience  of  the  problems 
faced  by  SMEs  to  facilitate  access  to  APAs  for  SMEs  where  APAs  are  useful  for 
dispute  avoidance  or  resolution.  This  wording  is  intended  to  encourage  a  flexible 
approach when accepting cases into an APA programme. 

Some tax administrations offer other options to obtain a measure of certainty of tax 
treatment.  A  non-binding  opinion  may  be  given.  In  that  case  a  tax  administration 
specialist will offer a view on a transaction perhaps confirming that transfer pricing 
is in point and acknowledging that a suggested OECD methodology is  appropriate. 
This  approach  falls  short  of  agreeing  the  actual  transfer  price.  There  may  be  a 
clearance  or  rulings  system  that  gives  a  binding  view  from  the  tax  administration. 
The clearance or ruling obtained may be obtained ex-ante the relevant tax return. 

Measures directed to SMEs and “small transactions” have been identified as some of 
the most frequently encountered simplification measures. 

Several commentators suggest that the use of safe harbours will provide a measure of 
simplification  for  SMEs  as  well  as  saving  on  administrative  resource  and  reducing 
compliance burden. 

To  improve  clarity  and  transparency  for  both  SMEs  and  tax  administrations  it  is 
recommended  that  each  tax  administration  sets  out  what  advance  certainty 
procedures are available on transfer pricing, how to access those procedures and the 
outcomes  that  can  be  expected.  Information  currently  available  is  contained  in  the 
DOC: JTPF/001/ANNEX/2011/EN. 

Pre-audit recommendations: 

13  

See DOC: JTPF/001/ANNEX/2011/EN 

 
 
                                                            
R6. To facilitate voluntary compliance Member States should ensure SMEs have access 
to  up  to  date  information  and  advice.  It  is  recommended  that  each  Member  State 
establishes an electronically accessible point of information site including details of who 
to contact for further advice. A list of those sites will be held on the JTPF website and 
links provided. 

R7.  Member  States  and  the  business  community  should  take  opportunities  to  build 
constructive relations with individual SMEs and their representative groups. 

R8.  Member  States  should  seek  to  increase  SME  awareness  of  and  ability  to  access 
processes that enable SMEs to gain certainty in advance of a transaction taking place or 
it being reported for tax purposes. 

R9.  Members  States  are  invited  to  actively  develop  simplification  measures  to  reduce 
administrative and SME compliance burden. 

Audit 

29. 

30. 

31. 

32. 

33. 

At  least  one  Member  State  takes  the  view  that  a  policy  of  exempting  most 
transactions  of  its  SMEs  from  its  transfer  pricing  rules  is  a  proportionate  response. 
Clearly that approach has advantages in resource savings and certainty of treatment 
but  it  may  possibly  have  some  detrimental  effects  on  the  tax  base  of  a  country 
implementing it, the significance of which would vary depending on the size of the 
activities  conducted  by  SMEs  in  such  country.  But  asymmetries  of  treatment  can 
arise if associates are not similarly exempted in other Member States 

Other  Member  States  take  a  less  broad  based  approach  when  implementing  the 
principle of proportionality. In both the audit and APA processes specific measures 
are put in place and include: streamlined documentation requirements; provision of 
relevant information orally; preparation of a limited transfer pricing study by the Tax 
Administration; Tax administration provides assistance to the taxpayer in preparing 
comparable  data;  special  measures  for  long  term  contracts.  More  details  on  these 
current measures are in the DOC: JTPF/001/ANNEX/2011/EN. 

The  JTPF  felt  that  adherence  to  the  principle  of  proportionality  gave  an  overall 
framework  with  enough  flexibility  for  tax  administrations  to  develop  their  own 
specific  measures.  Tax  administrations  are  encouraged  to  look  at  measures  already 
introduced by others and seek opportunities to incorporate them into their own rules 
as appropriate. 

It  is  also  recommended  that  approaches  available  in  one  process  may  have  similar 
benefits  in  another.  Examples  of  this  are  tax  administration  assistance  in  the  APA 
process  by  preparing  comparable  data  or  a  limited  transfer  pricing  report  for  the 
taxpayer. That type of assistance would be equally useful in the audit process. 

Similarly, existing JTPF reports can be usefully cross referenced to this subject. For 
example,  in  the  report  on  intra-group  services,  the  process  of  evaluating  an  arm's 
length price was discussed. The report acknowledged that cost benefit considerations 
are  particularly  appropriate  in  low  tax  risk  cases.  The  report  proposes  that  in  such 
cases it is particularly important that a balance is sought between available resource, 
compliance  burden  and  the  potential  level  of  adjustment.  The  commentary  in  the 
report on narratives and an arm's length charge is also relevant. Emphasis is given in 

 
 
34. 

35. 

the report on working with a minimum rather than maximum amount of information 
when evaluating a transfer price. It is suggested that the same emphasis could equally 
apply when evaluating a SMEs' transfer prices. 

The  subject  of  documentation  related  penalties  was  considered.  It  would  be 
inconsistent for a tax administration to have a streamline approach to documentation 
requirements  pre-audit  but  then  to  impose  penalties  for  the  absence  of  additional 
documentation  required  only  as  a  result  of  an  audit,  if  the  taxpayer  acted  in  good 
faith,  relying  on  the  streamline  approach,  and  is  not  able  to  supply  the  required 
documentation. 

Concerns were raised that experienced tax administration transfer pricing personnel 
do not often deal with SME transfer pricing issues. This could lead to a disparity of 
treatment  between  SMEs  and  non-SMEs.  Some  administrations  avoid  the  potential 
problems of less experienced officials being assigned to SME transfer pricing work 
by  structural  means,  for  example  they  have  dedicated  SME  centres  dealing  with  a 
wide variety of cases but by a relatively small group of people. Other administrations 
have process systems wherein an internal peer group review of audits take place to 
ensure consistency. Both approaches are recommended for consideration. 

Recommendations: 

R10.  When  considering  SME  audit  approaches,  Member  States  are  encouraged  to 
consider  the  simplification  measures  already  introduced  by  others  and  where  possible 
introduce similar measures in their own Member States. 

R11.  Previous  JTPF  reports  contain  useful  material  on  pragmatic  approaches  to 
transfer pricing issues. Member States are invited to review those previous reports with 
a view to drawing on the principles established in those reports that may equally apply 
in this context. 

R12. It would be inappropriate to impose documentation related penalties arising from 
an audit requirement to provide documentation that was not required pre-audit, if the 
taxpayer was acting in good faith, relying on the streamline approach, and is not able to 
supply the required documentation. 

R13.  Member  States  should  seek  to  ensure  that  when  SMEs  are  audited  for  transfer 
pricing  purposes  they  receive  appropriate  treatment.  Internal  peer  group  reviews  or 
structural  organization  of  audit  resource  are  put  forward  as  cost  effective  means  of 
achieving that objective. 

Dispute Resolution 

36. 

Once  a  transfer  pricing  adjustment  has  been  made  it  often  gives  rise  to  potential 
double tax. A claim to relief from that double tax is available under a tax treaty, the 
so-called  Arbitration  Convention14  (AC)  or  both.  For  SMEs  the  quantum  of  relief 
sought is, generally, at the lower end of the scale but the impact on their business is 
often at the high end of their scale. Additionally, the timescales involved in resolving 

14  

Convention on the elimination of double taxation in connection with the adjustment of profits of 
associated enterprises, OJ L 225, 20.8.1990, p. 10. 

 
 
                                                            
37. 

38. 

39. 

claims  are  often  disproportionate  to  the  complexity  and  the  amounts  involved  in  a 
claim. 

It  is  suggested  that  in  dealing  with  SME  claims  either  from  their  own  auditors  or 
from other MS, tax authorities make greater use of their authority to resolve double 
taxation unilaterally, either under Article 6(2) of the AC or under the provisions of 
their  double  taxation  conventions  corresponding  to  Article  9  of  OECD  Model  Tax 
Convention. 

If an adjustment involving a non-complex transaction with a relatively low monetary 
value does need to go through the full Mutual Agreement Procedure (MAP) referred 
to in  the  double taxation  conventions  or the procedure  foreseen in Section 3  of the 
AC, it is suggested there is a role for a fast track approach. The JTPF has not detailed 
the process of such an approach but notes it is likely to involve CAs agreeing to work 
to  much  shorter  time  scales  than  might  be  the  case  in  a  large  complex  adjustment. 
Also  the  principles  underlying  the  compliance  approach  and  detailed  above  could 
equally apply here. For example, taking a decision on a minimum of information; a 
flexible  approach  as  to  how  information  is  supplied;  for  example,  the  provision  of 
relevant  information  orally  rather  than  in  formal  written  position  papers.  The  fast 
track approach could also be based for instance, in some countries, on a de minimis 
rule. 

The need for formal dispute resolution processes may be reduced if the relevant tax 
administration  auditors  are  in  direct  communication  with  each  other  in  the 
framework  of  the  MAP  foreseen  in  the  double  taxation  conventions  or  of  the 
procedures set out in the AC to better understand the  reasoning  behind a particular 
adjustment,  but  this  communication  must  not  contravene  exchange  of  information 
rules.  A  way  to  achieve  such  direct  contacts  may  be  provided  through  meetings  at 
which respective local auditors, acting as competent authorities (CA), discuss certain 
cases directly and agree upon appropriate solutions, possibly with low involvement 
of regular CA staff. 

Recommendations: 

R14. Tax Authorities are requested to make use of their authority to act unilaterally in 
resolving transfer pricing double tax in SME cases. 

R15.  Fast  track  dispute  resolution  processes  are  encouraged  for  the  purposes  of 
resolving noncomplex low value SME claims to relief from double tax. 

R16.  Alternative  approaches  to  dispute  resolution  including  auditor  to  auditor  contact 
and de minimis limit rules should be explored and implemented by tax administrations 
where  appropriate  in  the  framework  of  the  MAP  foreseen  in  the  double  taxation 
conventions and of the procedures set out in theAC. 

V. 

40. 

CONCLUSIONS 

The JTPF recognises that SMEs have particular needs in meeting their requirement 
to  comply  with  transfer  pricing  rules.  The  JTPF  notes  Member  States  have  already 
implemented  some  valuable  measures  in  responding  to  those  needs  and  this  report 
seeks to build on those measures. 

 
 
41. 

42. 

43. 

The  findings  and  recommendations  in  this  report  rely  on  the  application  of  the 
principle  of  proportionality  backed  by  a  flexible  implementation  of  that  principle. 
The report also suggests how SMEs may be identified so that suggested measures in 
the report can be effectively targeted. 

As  appropriate  the  particular  needs  of  SMEs  should  be  taken  into  account  in  the 
future work programme items of the JTPF. 

At regular intervals the effect of SME measures recommended by the JTPF should be 
monitored. 

 
 
APPENDIX II 
REPORT ON COST CONTRIBUTION ARRANGEMENTS ON SERVICES NOT 
CREATING INTANGIBLE PROERTY (IP) 

I. 

1. 

2. 

3. 

4. 

5. 

II. 

6. 

7. 

INTRODUCTION 

Cost  Contribution  Arrangements  (CCAs)  are  commonly  used  as  a  cost-effective 
means  for  multinational  enterprises  (MNEs)  to  carry  out  the  group's  activities.  The 
business decision to have recourse to a CCA can be justified by various reasons, e.g. 
reasons of economies of scale, sharing of risks or skills or resources. 

The topic of CCAs has been of long-term interest to the Joint Transfer Pricing Forum 
(JTPF).  It  was  carried-over  from  its  previous  work  programme  and  under  the  new 
mandate  the  JTPF  confirmed  its  former  decision  to  explore  the  possible  scope  and 
degree to which a common approach to CCAs could be developed within the EU. 

CCAs  are  thoroughly  discussed  in  chapter  VIII  of  the  OECD  Transfer  Pricing 
Guidelines (OECD Guidelines) and the OECD is currently involved in a project on 
the transfer pricing aspects of intangibles. To avoid duplicating OECD work, JTPF 
work focuses on services not creating intangibles (IP). This work should be seen as 
supplementing the existing guidance and completing the JTPF’s work on low value 
adding intra group services (JTPF IGS Guidelines).  

This report focuses on those issues which are for a reviewer difficult to deal with in 
practice and proposes how best to address them. The term reviewer covers both the 
taxpayer and the tax administration. Underpinning this report is the assumption that 
both MNEs and tax administrations act in good faith and unequivocally endorse the 
OECD principles. The emphasis of the report, therefore, is on how most expediently 
a  reviewer  may  conclude  that  the  arm's  length  principle  (ALP)  has  been  applied  to 
CCAs on services not creating IP.  

Both OECD Guidelines (mainly chapter VIII but also VI and VII in relation to the 
arm's  length  principle  determination)  and  JTPF  IGS  Guidelines  are  taken  into 
consideration in this document.  

TERMINOLOGY 

Given  that  there  may  be  a  different  understanding  on  whether  and  how  a  CCA  on 
services may be distinguished from intra-group services charged directly or by way 
of creating a cost pool, this chapter seeks to establish a common understanding of the 
terminology used. It describes the concept of a CCA on services and distinguishes it 
from intra-group services. 

A CCA is defined under 8.3 of the OECD Guidelines as "a framework agreed among 
business  enterprises  to  share  the  costs  and  risks  of  developing,  producing  or 
obtaining  assets,  services  or  rights,  and  to  determine  the  nature  and  extent  of  the 
interests  of  each  participant  in  those  assets,  services  or  rights.  A  CCA  is  a 
contractual  arrangement  rather  than  necessarily  a  distinct  juridical  entity  or 
permanent  establishment  of  all  the  participants.  In  a  CCA  each  participant's 
proportionate  share  of  the  overall  contributions  to  the  arrangement  will  be 
consistent with the participant's proportionate share of the overall expected benefits 
to be received under the arrangement, bearing in mind that transfer pricing is not an 
exact science." 

 
 
 
 
8. 

Illustration of a CCA on services:  

Cost contribution arrangement

Parent 
company 

Subsidiary A

Subsidiary B

Subsidiary C

Provision of services

Allocation of costs

9. 

The  concept  of  intra-group  services  is  described  in  7.2  of  the  OECD  Guidelines: 
"Nearly every MNE group must arrange for a wide scope of services to be available 
to  its  members,  in  particular  administrative,  technical,  financial  and  commercial 
services"  and  "The  cost  of  providing  such  services  may  be  borne  initially  by  the 
parent,  by  a  specially  designated  group  member  ("a  group  service  centre")  or  by 
another group member". Chapter VII of the OECD Guidelines provides guidance for 
determining  whether  intra-group  services  have  been  rendered,  on  direct  or  indirect 
charging mechanisms and for determining under which circumstances services may 
be  charged  at  cost  or  whether  and  how  an  arm’s  length  charge  including  a  profit 
element may be determined. 

 
 
 
 
10. 

Illustration of Intra-group services: 

Intra-group services

Parent 
company 

Subsidiary A

Subsidiary B

Subsidiary C

Provision of services

Management fees

11. 

A  further  variant  not  explicitly  mentioned  in  the  OECD  Guidelines  but  often 
encountered  in  practice  is  arrangements  where  several  members  of  a  multinational 
group  pool  the  costs  of  certain  services  and  charge  them  (directly  or  indirectly)  to 
members of the group benefiting from those services. Further it is also possible that 
some  members  of  the  multinational  group  agree  on  a  CCA  on  services  and  other 
members  of  the  group  that  do  not  participate  in  the  CCA  provide  services  to  the 
members of the CCA. A participant in a CCA can also engage a separate independent 
entity to perform all or part of its activities.  

12. 

In  practice  it  is  sometimes  difficult  to  differentiate  between  (shared)  intra-group 
services - including cost pools - and CCAs on services not creating IP. The following 
table is intended to help reviewers to differentiate between the two concepts. 

CCAs on services not creating IP 

Intra-group services 

Agreement  to  share  costs,  risks  and  benefits 
where all participants contribute in cash or in 
kind. 

to 

limited 

Intra-group  services  are 
the 
provision  or  acquisition  of  a  service  by 
members of the MNE Group. The risk of not 
successfully  and  efficiently  providing  the 
service  is  generally  borne  by  the  service 
provider. 

If  participants  join  or  leave  a  CCA,  shares 
should  be  adjusted/rebalanced  in  accordance 
with the ALP.   

the 
service  agreement  or 
Terminating 
extending 
to  other  participants  has 
generally  no  implication  on  other  service 
recipients. 

it 

 
 
 
 
 
Written agreements are highly recommended 
for  reasons  of  having  the  CCA  accepted  or 
recognised  by  tax  administrations.  They  are 
even  compulsory  in  some  MS.  A  written 
agreement  and/or  appropriate  documentation 
is important for the reviewer when examining 
the implementation/performance of the CCA. 

In  practice,  formal  contracts  are  not  always 
available.  The  agreement  often  is  limited  to 
the  direct  relationship  between  the  provider 
and  the  recipient  of  the  service.  It  should  be 
feasible 
the 
perspective  of  the  provider  the  service  has 
been rendered and from the perspective of the 
recipient  the  service  provides  economic  or 
commercial value to enhance his commercial 
position (section VII.1 IGS Guidelines) 

to  demonstrate 

from 

that 

As  all  participants  are  contributing  to  a 
common  activity  and  share  costs  and  the 
contributions  reflect  the  expected  benefits, 
contributions are usually valued at costs. 

The profit element charged by the provider of 
the  service  is  usually  a  key  element  as  the 
provider  will  not  share  profits  with  the 
recipients. 

The  allocation  of  the  costs  is  based  on  the 
expected  benefits  for  each  participant  from 
the CCA. 

The allocation key is based on the extent each 
company has requested/received or is entitled 
to the service.  

III. 

13. 

14. 

IV. 

15. 

16. 

SCOPE 

While the JTPF IGS Guidelines focus on issues encountered in relation to services of 
an  administrative  nature  ancillary  to  the  business  of  the  recipient,  this  document 
addresses  specific  considerations  in  cases  where  all  kinds  of  intra-group  services 
without IP impact are embedded into a CCA.  

An  exhaustive  definition  of  the  services  which  may  be  the  subject  of  a  CCA  is 
neither  possible  nor  desirable.  Services  that  are  within  the  scope  of  this  document 
might include the following activities: IT, logistics, purchasing, real estate, finance, 
tax, human resources services, accounting, payroll and billing. This list of services is 
only  illustrative  and  does  not  automatically  imply  that  a  service  is  covered  by  or 
excluded from the scope of this document. 

GENERAL  FEATURES:  IS  THE  CCA  CONSISTENT  WITH  THE  ARM'S  LENGTH 
PRINCIPLE  

As a general principle, a CCA is consistent with the ALP if the contributions agreed 
upon  correspond  to  what  independent  enterprises  would  have  agreed  to  contribute 
under comparable circumstances given the benefits they reasonably expect to derive 
from the arrangement and which includes the sharing of costs and risks to satisfy a 
common  need.  The  relevant  question  for  a  reviewer  under  Article  9  of  the  OECD 
Model Tax Convention is whether a CCA is implemented/ performed in accordance 
with the ALP. 

The  OECD  Guidelines  (9.163)  state  that  MNEs  are  free  to  organise  their  business 
operations  as  they  see  fit.  A  tax  administration  may  perform  where  appropriate 
transfer  pricing  adjustments  in  accordance  with  Article  9  of  the  OECD  Model  Tax 
Convention.  This  means  that  a  MNE  should  take  into  account  the  respective 
implications  (e.g.  on  bearing  risks)  of  each  of  the  reasonably  available  alternatives 
when  deciding  whether  services  performed  intra-group  will  be  charged  directly  or 

 
 
 
 
indirectly, by way of IGS (including cost pools), or whether a CCA is considered as 
being  more  appropriate.  The  choice  should  not  be  a  simple  labelling  exercise  (see 
also paragraph 43 below). The relevant facts should be documented. This should not 
lead the reviewer to challenge the business choice or the reasons behind the choice or 
to request from the taxpayer an analysis of what was the best choice. 

A  CCA  on  services  not  creating  IP  that  is  consistent  with  the  ALP  will  have  the 
following features: 

i)  The arrangement should make business sense. 

ii)  The economic substance should be consistent with the terms of the CCA.  

iii)  The  terms  of  a  CCA  should  be  generally  agreed  prior  to  the  beginning  of  the 

activity. 

iv)  The  terms  of  a  CCA  should  be  at  arm's  length  taking  into  account  the 
circumstances  known  or  reasonably  foreseeable  at  the  time  of  entry  into  the 
arrangement. 

v)  Each participant should have a reasonable expectation of benefit. 

vi)  The  participant's  share  of  the  costs  should  be  consistent  with  its  share  of  the 

expected benefits.  

vii)  Reasonably  expected  benefits  can  be  assessed  in  terms  of  efficiency  or 

effectiveness in quantitative or qualitative terms.  

viii) Contributions  by  a  participant  can  be  in  cash  or  in  kind  and  therefore  active 
participation  is  not  a  requirement.  The  level  of  influence  on  decision-making 
will vary depending on the type of CCA, the expertise of the participants and the 
amount of costs being allocated to the respective participants. 

ix)  When  a  service  subject  to  a  CCA  is  also  provided  to  or  received  from  non-

participants in the CCA it has to be valued at arm's length.  

x) 

If  participants  join  or  leave  the  CCA,  shares  should  be  adjusted/re-balanced  in 
accordance with the ALP. 

The  actual  outcome  may  differ  from  the  projected  outcome,  e.g.  the  contribution 
provided by a participant is excessive or the benefit derived from its participation in 
the CCA is inadequate. When such a difference occurs, the reviewer should analyse 
the  reasons  for 
this  difference  before  concluding  whether  a  participant’s 
proportionate  contribution  has  been  correctly  or  incorrectly  determined,  or  whether 
the  participant’s  proportionate  expected  benefits  have  been  correctly  or  incorrectly 
assessed. 

A  further  question  for  the  reviewer  is  whether  the  difference  is  so  material  that  it 
requires an adjustment or the difference is considered as small enough to avoid any 
adjustment, given that the OECD Guidelines provide that tax administrations should 
refrain from making minor or marginal adjustments. The reviewer should also bear in 
mind that any modification will impact the other participants, which is also a factor 
in favour of avoiding small adjustments. 

In  some  cases  the  facts  and  circumstances  may  also  indicate  that  the  reality  of  the 
arrangement  differs  from  the  terms  purportedly  agreed  by  the  participants  (8.29 
OECD  Guidelines).  A  reviewer's  decision  should  always  be  based  on  the  facts  and 
circumstances  relating  to  the  specific  arrangement  for  an  adequate  period  but  the 

17. 

18. 

19. 

 
 
20. 

21. 

V. 

22. 

23. 

24. 

25. 

reviewer should generally refrain from making an adjustment based on a single year. 
A reviewer should also take into consideration that the ALP does not require per se 
that projections of benefits match the actual benefits and even a material difference 
between  actual  and  projected  benefits  does  not  automatically  mean  that  the 
projection was not at arm's length. Care should be taken to avoid the use of hindsight. 

Considering  the  previous  paragraph,  the  application  of  the  ALP  might  require  an 
adjustment  of  the  participant's  contribution  through  a  balancing  payment  when  the 
situation arose for example from an incorrect evaluation of the expected benefits. In 
some  other  cases  part  or  all  of  the  provisions  of  the  CCA  will  be  disregarded  e.g. 
when the facts and circumstances differ from the terms agreed in the CCA (8.26 to 
8.30 of the OECD Guidelines). 

Balancing  payments  will  be  treated  as  an  additional  cost  for  the  payer  and  as  a 
reimbursement of costs for the recipients. 

CORROBORATIVE  INFORMATION:  NARRATIVE  RELATED  TO  A  CCA  ON  SERVICES 
NOT CREATING IP 

In  the  light  of  the  facts  and  circumstances  of  a  case,  the  level  of  experience  and 
knowledge  of  the  particular  MNE  concerned,  a  reviewer  may  take  different 
approaches  in  requesting  what  is  considered  sufficient  corroborative  information  to 
confirm  that  a  CCA  on  services  complies  with  the  ALP.  In  making  an  informed 
decision, access to appropriate, good quality information is crucial. 

In  preparing  or  reviewing  a  CCA,  a  reviewer  will  need  to  understand  and  achieve 
confidence  on  several  key  issues.  The  main  question  is:  "does  it  achieve  an  arm's 
length  outcome"?  In  most  circumstances  this  question  may  be  answered  by  the 
provision of a narrative that includes the information requested at paragraphs 24 and 
25 below15. 

The  key  element  is  of  course  the  agreement  itself.  There  should  be  a  clear 
expectation of mutual benefit for all parties to a CCA. An independent party would 
not  enter  into  a  CCA-type  arrangement  without  a  reasonable  expectation  of  benefit 
(see  VI.1  below).  Secondly,  the  agreement  should  ensure  that  the  allocation  of  the 
contributions reflects each participant’s expected benefits (see VI.2 below). 

As each CCA will be different, the exact content and extent of the narrative may vary 
but  the  following  list  of  items  should  meet  the  requirements  of  most  reviewers.  If 
relevant, additional documentation can always be provided. 

i)  General information about the CCA 

a) Explaining the CCA within the overall context of the MNE’s business in order 
to  understand  the  rationale  for  entering  into  the  CCA:  the  MNE's  overarching 
transfer  pricing  policy,  the  type  of  services  that  are  subject  to  the  CCA, 
participants'  mutual  economic  interest,  required  knowledge  and  skills,  what 
contributions and risks are shared, etc. 

b) List of participants and the allocation of responsibilities and tasks associated 
with the CCA activity between participants and other enterprises. 

c) The budget for the CCA and its expected duration.  

15 

This is achieved in a similar way in Section VI Narrative, paragraphs 21 to 25 of JTPF IGS Guidelines. 

 
 
 
                                                            
ii)  Expected benefit from the CCA 

d)  Expected  benefit  to  be  derived  by  each  participant  and  the  way  it  was 
assessed  and  reflected  in  the  allocation  method  (including  methodology  and 
any projections used). 

iii)  Contribution to the CCA 

e)  The  form  and  value  of  each  participant's  contributions  and  a  detailed 
description of how the value of initial and ongoing contributions is determined.  

f)  A  description  of  the  accounting  standard  used  and  how  it  is  applied 
consistently  to  all  participants  in  determining  expenditures  and  the  value  of 
contributions.  A  description  of  direct  and  indirect  costs  included  in  the 
contribution  pool,  settlement  dates,  payment  methods  and  any  budgeted  versus 
actual adjustments. 

g)  Information  about  the  existence  of  government  subsidies  or  tax  incentives 
linked to the participants’ contributions and their impact.  

iv)  Monitoring/Adjusting the CCA 

h) Information about balancing payments, i.e. under which conditions they arise, 
how they are calculated and when they are due. 

i) A description of the Group standard as it relates to its audit approach and as 
applied  to  CCAs.  For  example,  safeguards  in  place  to  ensure  the  consistent 
application of an allocation key for a particular service; ensuring costs/services 
are not duplicated. 

j) How the CCA conditions are monitored and updated. 

k)  An  understanding  of  how  new  participants  are  integrated  into  the  CCA  and 
how  a  participation  is  terminated.  Provision  of  the  method  to  be  applied  when 
shares in the CCA need to be adjusted/rebalanced.  

v)  Relationship to other entities 

l) A list of other members of the Group or independent enterprises who benefit 
from  services  included  in  the  CCA.  Description  of  the  fees  to  be  charged  and 
allocation key(s) for the allocation between the participants. 

The above information may be made available and provided in different ways such 
as a dedicated written narrative or it may also be the case that the written agreement 
already provides most information. The important point is that the reviewer gets an 
understanding of how the CCA works in practice. 

SPECIFIC ASPECTS 

This  chapter  addresses  some  specific  issues  for  which  the  reviewers  might  need 
additional guidance. 

26. 

VI. 

27. 

VI.1.  The 'expected benefit' test 

28. 

The  'expected  benefit'  test  is  an  essential  element  in  the  setting-up,  appropriate 
monitoring and review of a CCA. It will be the basis for assessing the arm’s length 
nature of participants' contributions to the CCA and will justify the allocation key. 

 
 
 
 
 
29. 

30. 

31. 

Based on the ALP, a participant's contribution must be consistent with the expected 
benefits it will derive from its participation in the CCA. Benefit in this context means 
an  increase  in  economic  or  commercial  value  such  as  savings  in  expenses  or  an 
increase  in  income  or  profits.  An  appropriate  demonstration  that  profits  or  income 
can be maintained or losses/greater losses can be avoided may also be considered as 
an  expected  benefit.  It  should  be  noted  that  what  distinguishes  IGS  from  CCAs  as 
regards  the  benefit  test  is  that  for  CCAs  a  reviewer  should  check  -  in  addition  to 
verifying  whether  the  services  covered  were  actually  provided  (IGS  requirement)  - 
whether contributions are in accordance with the expected benefits that participants 
might derive from the CCA. 

It is important that the reviewer is satisfied that from a participant's perspective the 
contribution  is  in  accordance  with  expected  benefits  in  terms  of  e.g.  economies  of 
scale or sharing of risks and skills, and that the participant would have paid for the 
service or else performed the service itself. The key used for allocating costs should 
reflect  the  benefit  expected  by  the  participant  and  how  the  participant  takes 
advantage of the outcome of the CCA in a way consistent with the arrangement. 

The degree of certainty a reviewer requires to accept that the provision of a service 
under a CCA meets the arm's length standard will vary from case to case on a risk 
assessment  basis.  While  in  most  cases  the  expected  benefit  for  the  respective 
participant  can  easily  be  derived  from  the  appropriate  demonstration  of  the  overall 
benefit of the CCA and the appropriateness of the allocation key chosen, cases where 
the expected benefit for the individual is less clear require a stronger focus from the 
viewpoint of an individual participant. Additionally and depending on the facts and 
circumstances,  the  expected  benefit  may  also  be  evaluated  directly  i.e.  by  an 
estimation of the additional income to be generated or costs to be saved, or indirectly 
i.e. by using indirect indicators of the expected benefit such as turnover, number of 
employees, gross profits, etc.  

VI.2.  Contributions of each participant 

32. 

33. 

34. 

Each  participant's  contribution  must  be  consistent  with  what  independent  parties 
would have contributed in comparable circumstances. Valuation of the shares in the 
expected benefits is one of the key elements in CCAs. This will form the basis for the 
calculation of the contributions.  

Often  allocation  keys  are  used  to  determine  what  each  participant  will  have  to 
contribute,  although  the  allocation  method  might  be  based  on  estimated  costs  that 
will  be  saved  by  each  participant  in  the  arrangement.  The  guidance  on  selection, 
justification,  application,  documentation  and  potential  allocation  keys  given  in 
paragraphs  48  –  55  of  the  JTPF  IGS  Guidelines  applies  equally  in  the  context  of 
CCAs on services not creating IP.  

The  value  of  each  participant's  contribution  must  be  consistent  with  the  value  that 
independent parties would have agreed to in comparable situations. No specific result 
can be provided for determining participants' contributions in all situations, but rather 
the  question  must  be  resolved  on  a  case  by  case  basis  consistent  with  the  general 
operation  of  the  ALP.  With  respect  to  CCAs  in  general,  countries  have  experience 
both  with  the  use  of  costs  and  with  the  use  of  market  prices  for  the  purposes  of 
measuring value of the contributions to arm's length CCAs (8.15 OECD Guidelines). 
However, for the type of CCAs covered by this document, it is assumed that there is 
often  a  small  difference  between  pricing  at  costs  and  at  market  value  and  it  is 

 
 
35. 

36. 

37. 

38. 

therefore recommended for practical reasons to generally value the contributions at 
costs. 

As contributions are based on expected benefits this generally implies that they are 
initially  based  on  budgeted  costs.  In  service  CCAs  there  may  be  little  material 
difference between budgeted and actual costs and therefore it may be practical to use 
the  actual  costs  as  the  measure  of  the  contribution  of  each  participant.  However, 
where adjustment of the contribution from estimated to actual costs is necessary this 
would  generally  be  done  retrospectively,  i.e.  by  adjusting  the  historical  budgeted 
costs. Unless national law prohibits it, it may be appropriate for practical reasons to 
make the adjustment prospectively. This means taking the eventual adjustment into 
account in the following year if it can be considered as not having a major impact. 
The  question  of  whether  any  adjustment  of  the  contributions  from  cost  (at  either 
budgeted  or  actual)  to  market  price16  is  required  to  value  the  contribution  is 
considered in paragraph 34.  

In order to address the issue of adjustments to contributions, the OECD Guidelines 
recommend  preparing  an  annual  account  of  expenditure  incurred  in  conducting  the 
CCA  activity,  which  would  include  a  detailed  description  of  how  the  value  of  the 
contributions is determined and how accounting principles are applied consistently to 
all participants in determining expenditures and the value of the contributions. It can 
be assumed that also third parties, when contributing jointly to a certain project, will 
agree on a common standard on how to determine their contributions. For practical 
reasons  it  is  therefore  recommended  that  MNEs  should  be  allowed  to  use  the 
accounting  standards  that  are  generally  used  throughout  the  group.  A  tax 
administration is however entitled to require adjustments, especially in cases where 
permanent major differences with the domestic accounting standards can be expected 
over the duration of the CCA. 

Contributions should include all relevant costs for the acquisition, maintenance or for 
securing  the  benefits  derived  from  the  arrangement.  A  reviewer  will  need  to 
understand  which  costs  have  been  considered  relevant  (and  can,  therefore,  be 
allocated). Sometimes this will be self-evident from the type of services covered by 
the  CCA.  Sometimes,  in  more  complex  situations,  the  arrangement  should  clearly 
explain  what  costs  are  excluded  or  how  potential  duplication  of  costs  has  been 
avoided. 

A related issue is the treatment of tax incentives and government subsidies which is 
addressed in 8.17 of the OECD Guidelines. The key question is whether costs passed 
to the CCA should only include costs effectively spent from which tax incentives and 
government  subsidies  have  been  deducted.  "Whether  and  if  so  to  what  extent  these 
savings  should  be  taken  into  account  in  measuring  the  value  of  a  participant's 
contribution  depends  upon  whether  independent  enterprises  would  have  done  so  in 
comparable circumstances". 

VI.3.  Anticipated versus actual benefit 

39. 

As CCAs are arrangements based on expected benefits, independent parties might in 
consideration of the often long duration of the CCA include a clause in the contract 
allowing  regular  assessment  of  whether  expected  benefits  are  in  line  with  actual 
benefits and whether contributions should not be changed in the future. 

16 

8.15 OECD TPG refers to valuing contributions at market price. 

 
 
                                                            
40. 

41. 

42. 

Addressing  those  two  concerns  opens  the  issues  of  whether  contributions  can  be 
adapted to the actual situation and whether this is to be considered as arm’s length or 
as the improper use of hindsight. 

The CCA must be examined by reference to the assumptions of future benefits based 
on the economic and commercial circumstances prevailing or reasonably foreseeable 
at  the  time  the  arrangement  is  entered  into.  Therefore  if  a  reviewer  considers  the 
benefit projections as reasonable, future events affecting the initial projections should 
not lead to retrospective adjustment of the contributions. 

As unexpected or unforeseeable events or circumstances may affect the initial benefit 
assumptions,  a  reviewer  should  consider  whether  independent  parties  would  have 
provided for an adjustment or renegotiation of the agreement in such cases. 

VI.4.  Participation in a CCA 

43. 

The  key  feature  of  a  CCA  is  that  the  contributions  of  the  participants  are  in 
accordance  with  the  expected  benefits  of  the  respective  participants  from  the 
participation in the CCA. An enterprise taking its expected benefit solely or mainly 
from the performance of the CCA activity itself would not be considered as being a 
member  of  the  CCA  but  rather  as  a  service  provider  (company)  that  would  add  a 
profit  element  in  its  calculation,  i.e.  should  be  considered  as  a  company  providing 
services at arm's length. 

VI.5. 

Joining/Leaving a CCA  

44. 

45. 

The  general  issue  of  entities  joining  or  leaving  a  CCA  is  in  practice  often  a  very 
difficult topic even if mergers and restructuring are part of the day-to-day business of 
MNEs.  How  to  assess  the  value  of  work  in  progress  and/or  the  specific  skills 
acquired  from  past  activities  are  questions  often  leading  to  difficulties  for  any 
reviewer. 

However,  as  the  present  scope  is  limited  to  CCAs  on  services  not  creating  IP,  the 
examination  of  buy-in  /  buy-out  issues  should  be  very  limited  (or  non-existent). 
Answering the following questions should help reviewers: what additional costs will 
be paid by participants when an entity leaves or exceptionally when it joins? Is the 
arrangement still sustainable after the departure of this company? Should those new 
elements  (different  cost  structure,  or  expertise,  or  skills,  or  risks,  etc.)  be 
compensated in money or do they only lead to a revision of the expected benefits that 
will  lead  to  the  adoption  of  new  allocation  keys  or  does  the  new  participant  bring 
specific knowledge? 

46. 

Clearly, if the outcomes of prior activities developed under the CCA have no value, 
no compensation should take place. However, entry or departure of a company will 
generally lead to an adjustment of the proportionate shares (allocation keys). 

VI.6.  Documentation 

47. 

48. 

Reviewers should be aware that CCAs are already governed by the Code of Conduct 
on  EU  Transfer  Pricing  Documentation  (EU  TPD)  wherein  it  is  stated  that  MNEs 
should include in the masterfile a list of CCAs as far as group members in the EU are 
affected. 

The  OECD  Guidelines  (5.4)  refer  to  prudent  business  management  principles  that 
would  govern  the  process  of  considering  if  transfer  pricing  is  appropriate  for  tax 

 
 
49. 

50. 

51. 

52. 

purposes  and  the  extent  of  any  required  level  of  supporting  transfer  pricing 
documentation. 

This  theme  is  echoed  in  point  2.3.1  of  the  EU  TPD  which  says:  "The  "prudent 
business management principle", based on economic principles, implies that the sort 
of evidence that would be appropriate in relation to a transaction of large value might 
be very different from the sort of evidence that would be appropriate in relation to a 
transaction where the overall value is significantly smaller". 

Applying  this  principle  to  CCAs  would  lead  participants  to  prepare  or  to  obtain 
materials  about  the  nature  of  services  covered  and  the  terms  of  the  arrangement  as 
well  as  its  consistency  with  the  ALP  (including  projections  used  to  establish  the 
expected benefits and budgeted versus actual expenditures). 

It should be noted that information from one source (e.g. a written agreement) may 
cover information already covered by another source (e.g. a narrative). The extensive 
use  of  computerized  systems  also  provides  the  opportunity  to  see  summary  level 
detail which may then remove the need for more extensive primary documentation. 

CCA  agreements  supplemented  where  necessary  by  information  listed  in  the 
narrative  relating  to  CCAs  are  considered  by  the  JTPF  as  relevant  information  as 
regards EU TPD requirements. 

VI.7.  Post review considerations 

53. 

54. 

CCAs will often involve more than two entities and are often set up between many or 
even  all  the  members  of  a  MNE.  Adjustments  may  therefore  not  only  affect  one 
entity but impact on all the other participants. The avoidance of double taxation may 
in  those  cases  of  dispute  require  cost  and  resource  intensive  procedures.  It  is 
therefore  recommended  that,  on  the  one  hand,  tax  administrations  refrain  from 
challenging  the  participation  or  contribution  allocated  to  their  taxpayer  for  minor 
adjustments  and  on  the  other  hand,  taxpayers  should  make  efforts  to  follow  these 
guidelines when setting up and documenting their CCAs on services not creating IP.  

In  case  of  dispute  the  mutual  agreement  procedure  may  involve  more  than  two 
Competent  Authorities.  Therefore  it  will  be  useful  to  apply  the  multilateral 
approaches recommended in the Code of Conduct on the Arbitration Convention for 
triangular cases. 

VII. 

CONCLUSIONS 

55. 

56. 

Compliance with the recommendations in this report, in most cases falling within its 
scope,  will  facilitate  the  evaluation  and  make  it  easier  for  tax  administrations  to 
accept that the ALP has effectively been applied..  

It  is  recommended  that  for  future  reference  and  at  the  end  of  this  process  the 
narrative  becomes  a  file  note  in  conjunction  with  some  arrangements  for  regular 
updates. 

57. 

The JTPF will monitor the effect of these guidelines regularly.  

 
 
 
ANNEX:  Summary  of  the  current  state  of  play  as  regards  Member  States'  CCA 

legislation, administrative guidance and best practices 

This  section  aims  to  summarise  the  current  state  of  play  as  regards  CCA  legislation  or 
administrative guidance within EU MS.  

The section below is drafted on the basis of contributions provided by EU tax administrations 
to reflect the situation prevailing on 1 July 2011. 

Question  1:  Do  you  have  specific  legislation  relating  to  CCAs?  If  not,  is  it  under 
consideration and when might it be introduced? 

Few MS have specific legislation on CCAs. 

Estonia,  Spain,  the  Netherlands,  Portugal  and  Slovenia  apply  specific  legal  provisions 
concerning CCAs for obtaining assets, rights or services, whereas Poland's legislation refers 
to CCAs only in the context of intangibles. Germany has specific provisions only as regards 
CCA  documentation.  Other  MS  use  the  OECD  Transfer  Pricing  Guidelines  or  their  own 
general TP guidelines to evaluate CCAs. 

Introducing new specific provisions on CCAs is only under examination in Greece. 

Question 2. Has your administration issued internal audit guidelines providing guidance 
on  CCAs  and  if  yes,  which  key  points  do  they  address  (e.g.  how  to  recognise  an 
arrangement, how to audit the arrangement, how to facilitate exchange of information 
with other countries, etc.)?  

Few MS have issued internal guidelines on auditing CCAs. 

Italy, Lithuania, Slovenia and the United Kingdom have guidelines on transfer pricing which 
also  cover  the  audit  of  CCAs.  In  particular,  the  UK  guidelines  stress  the  importance  of 
identifying  a clear  expectation of mutual, overall benefit to distinguish a  CCA from a more 
normal situation with straightforward transfer of goods or services. 

In  Hungary,  a  government  decree  on  documentation requirements  regarding  transfer pricing 
agreements in general is applied. 

Latvia  has  internal  general  guidelines  regarding  CCAs,  which  are  based  on  the  OECD 
guidelines.  

Portugal  is  in  the  process  of  approving  a  Transfer  Pricing  Audit  Manual  that  also  includes 
internal audit guidelines in areas such as CCAs.  

 
 
 
 
 
 
Question  3.  Has  your  administration  published  domestic  administrative  guidance  on 
CCAs  (Guidelines,  Regulations,  Circular  Letters,  etc.)  explaining  the  procedure  to  be 
followed  by  the  taxpayer  when  preparing  a  CCA,  with  particular  reference  to  the 
structure and documentation requirements (where existing, could you provide details of 
the electronic link to the documents)?  

Few MS have issued domestic administrative guidance on CCAs. 

In Denmark, CCAs are addressed in the Danish Transfer Pricing Documentation Guidelines.  

Estonia  has  issued  guidelines  containing  a  short  overview  of  the  OECD  TP  guidelines  and 
examples. 

In Hungary, a  government  decree on  documentation requirements regarding  transfer pricing 
agreements in general is applied. 

Germany has issued administrative guidance which is binding for the tax administration, but 
not for the courts. 

The  Italian  audit  guidelines  are  public,  addressed  to  tax  inspectors  but  also  followed  by 
taxpayers.  

Portuguese regulations envisage including relevant information on a CCA in the TP file. 

Question 4. What is the most common type of CCA used by enterprises in your MS? 

CCAs  dealt  with  by  MS  Tax  Administrations  most  often  relate  to  services,  development  of 
intellectual property, research and development and acquisition of assets. 

Questions 5-7. What particular practical problems have you encountered in dealing with 
CCAs and how have you addressed those problems? What are your particular concerns 
as  regards  CCAs  on  services?  Based  on  your  experience,  how  frequent  are  disputes 
linked to CCAs? 

The  most  common  practical  problems  encountered  in  the  context  of  CCAs  relate  to  the 
availability/timely  provision  by  taxpayers  of  sufficient  information/TP  documentation,  the 
suitability of allocation keys, the calculation of entry and exit fees, valuation of buy-in/buy-
out  payments,  distribution  of  costs,  identification  of  comparables,  applicability  of  profit 
margins, as well as the actual identification of a CCA. 

Specific  concerns  for  TAs  in  this  context  include  the  criteria  for  identification  of  a  CCA, 
measuring  the  value  of  participants'  contributions  to  a  CCA  and  evaluating  the  associated 
benefits (expected and actual) and risks for the purpose of allocating costs, the applicability of 
mark-ups, as well as access to relevant documentation.