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# 52012DC0516

**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) /\* COM/2012/0516 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)

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 2002[2], 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 decision[3].

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 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/EC[4] (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].

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 2011[6].

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 2012[7].

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.            Introduction

1.
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.

II.          Background

2.
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.

3.
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.

4.
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.

5.
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.

6.
Business
recognises that issues like management time and expert tax advisers' costs can
cause SMEs to refrain from accessing expert services.

7.
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.

III.         Defining an SME

8.
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/EC[9]
but is not widely applied for direct tax purposes by tax administrations. The
JTPF made the following observations on the use of a definition.

9.
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.

10.
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.

11.
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.

12.
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 both[10].

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.

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 regularly[11].

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.         SMEs: compliance and transfer pricing

14.
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.

15.
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.

16.
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

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 communication, the provision and
understanding of relevant information, 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.

Tax
administration and SME communication

18.
There is an increasing international recognition[12]
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.

19.
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.
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 that information can currently be found are
contained in DOC: JTPF/001/ANNEX/2011/EN.

21.
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

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 material[13].

Certainty
in advance of a transaction taking place

23.
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.

24.
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.

25.
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.

26.
Measures directed to SMEs and “small transactions” have been
identified as some of the most frequently encountered simplification measures.

27.
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.

28.
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:

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.
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

30.
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.

31.
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.

32.
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.

33.
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
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.

34.
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.

35.
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 Convention[14]
(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 claims are
often disproportionate to the complexity and the amounts involved in a claim.

37.
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.

38.
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.

39.
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.           Conclusions

40.
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.
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.

42.
As appropriate the particular needs of SMEs should be taken into
account in the future work programme items of the JTPF.

43.
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.            Introduction

1.
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.

2.
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.

3.
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).

4.
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.

5.
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.

II.          Terminology

6.
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.

7.
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:

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:

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. || Intra-group services are limited to 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.  || Terminating the service agreement or extending it to other participants has generally no implication on other service recipients.

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 to demonstrate that from 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)

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.         Scope

13.
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.

14.
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.

IV.         General
Features: is the CCA consistent with the arm's length principle

15.
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.

16.
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.

17.
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.

18.
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.

19.
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 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.

20.
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).

21.
Balancing
payments will be treated as an additional cost for the payer and as a
reimbursement of costs for the recipients.

V.           Corroborative Information: Narrative related
to a CCA on services not creating IP

22.
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.

23.
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 below[15].

24.
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).

25.
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.

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.

26.
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.

VI.         Specific aspects

27.
This
chapter addresses some specific issues for which the reviewers might need
additional guidance.

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.
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.

30.
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.

31.
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.
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.

33.
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.

34.
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 therefore recommended for practical
reasons to generally value the contributions at costs.

35.
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 price[16] is required
to value the contribution is considered in paragraph 34.

36.
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.

37.
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.

38.
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.

40.
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.

41.
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.

42.
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.
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.

45.
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.
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.

48.
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 purposes and the extent of any required level of supporting transfer
pricing documentation.

49.
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".

50.
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).

51.
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.

52.
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.
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.

54.
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.
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..

56.
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.

[1]              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.

[2]              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.

[3]              Decision 2011/C 24/03 of 25
January 2011 (OJ C 24, 26.1.2011, p. 3-4).

[4]              Commission
Recommendation of 6 May 2003 concerning the definition of micro, small and
medium-sized enterprises, OJ L 124, 20.5.2003, p. 36.

[5]              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.

[6]              Appendix I

[7]              Appendix II

[8]              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).

[9]              OJ L 124,
20.5.2003, p. 36.

[10]             See DOC:
JTPF/001/ANNEX/2011/EN.

[11]             See DOC:
JTPF/001/ANNEX/2011/EN.

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

[13]             See DOC:
JTPF/001/ANNEX/2011/EN

[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.

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

[16]             8.15 OECD TPG
refers to valuing contributions at market price.

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