KPMG report: Evaluating the equivalence of cost-sharing and cost contribution arrangements

A KPMG report that discusses circumstances under which a cost-sharing arrangement and cost contribution arrangement can be considered equivalent

Evaluating the equivalence of cost-sharing and cost contribution arrangements

Cost-sharing arrangements (CSAs) have been popular with U.S. multinational enterprises (MNEs) for many years now. A CSA is a specific type of arrangement defined in Treas. Reg. § 1.482-7 for the joint development of intangibles by related parties. The counterpart to a U.S. CSA in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations is a cost contribution arrangement (CCA), for which guidance is provided in Chapter VIII of the OECD guidelines.

If a CSA or CCA involves at least one U.S. participant, the arrangement will need to be evaluated under U.S. regulations. Historically, U.S. CSAs often involved related participants based in low- or zero-tax jurisdictions, which generally accepted an evaluation of the CSA under the U.S. regulations to be sufficient for establishing arm’s-length pricing. Thus, from a practical perspective, U.S. MNEs typically assessed a CSA under the U.S. regulations only. In 2015 the OECD substantially revised its guidance on CCAs under actions 8-10 of the OECD’s base erosion and profit-shifting (BEPS) initiative. Post-2015, U.S. CSAs generally include participants based in countries in Europe and Asia that are scrutinizing U.S. CSAs under the revised OECD guidance on CCAs. Thus, these CSAs need to be evaluated under both the U.S. regulations and the OECD guidelines to manage tax scrutiny to such arrangements.

Read a March 2023 report* [PDF 579 KB] prepared KPMG LLP tax professionals that compares the U.S. CSA rules and OECD CCA guidance, pointing out similarities and differences, and discusses the circumstances under which a CSA and a CCA can be considered equivalent.

*This article originally appeared in Tax Notes Federal (13 March 2023) and is provided with permission.


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