INTM422160 - Transfer pricing: methodologies: Advance Pricing Agreements: Cost Contribution Arrangements under the Advance Pricing Agreement Legislation

General

1.       This guidance sets out how HMRC operates the Cost Contribution Arrangement (“CCA”) Advance Pricing Agreement (“APA”) programme.

2.       It describes the circumstances in which HMRC may enter into APAs to provide certainty regarding the validity of a UK entity’s participation in a CCA. CCAs are defined at Chapter VIII of the OECD Transfer Pricing Guidelines (the “TPG”).

3.       In circumstances where HMRC considers that a CCA is a commercially viable prospect, the purpose of the APA is to provide certainty that HMRC will not challenge the validity of a UK entity’s participation in the CCA under Part 4 Taxation (International and Other Provisions) Act 2010 (“TIOPA 2010”).

4.       The CCA APA will not price the contributions of the UK participant to the CCA. Instead, it will confirm that no adjustment will be made on the basis that a UK entity is not a valid participant.

5.       HMRC will also consider requests for bilateral APAs with respect to participation, and/or the pricing of CCAs. These APAs are covered by the general APA Statement of Practice at INTM422000, rather than in this guidance on CCA APAs (CCA APAs being unilateral APAs relating only to UK entity participation in a CCA).

6.       The legal basis for CCA APAs is provided by the legislation at sections 218-230 of TIOPA 2010, which relates to APAs covering transfer pricing matters more broadly.

7.       If the taxpayer ceases to be a participant in the CCA during the term of the APA, then the application of Part 4 TIPOA 2010 to any payments or receipts relating to exit from the CCA or to other changes in CCA membership rights will be made on the basis that the taxpayer was a valid participant whilst it was a member of the CCA contractually.  

Scope of CCA APAs

8.       CCA APAs will be restricted to matters within section 218(2)(d) TIOPA 2010: that is, the tax treatment of any provision made or imposed between the taxpayer and an associate. The question that the APA addresses in accordance with s220(2) TIOPA relates only to the validity of participation of an entity in a ‘development CCA’.

9.       CCAs are defined at paragraph 8.3 of the TPG as 

a contractual arrangement among business enterprises to share the contributions and risks involved in the joint development, production or the obtaining of intangibles, tangible assets or services with the understanding that such intangibles, tangible assets or services are expected to create benefits for the individual businesses of each of the participants.

10.   Development CCAs are defined at paragraph 8.9 of the TPG as

“those established for the joint development, production or the obtaining of intangibles or tangible assets”.

11.   A business might consider a CCA APA in circumstances where they have entered into a CCA and certainty is desired regarding whether HMRC will make an adjustment on the basis that a UK entity is not a valid participant in the CCA under Part 4 TIOPA 2010.

Applications for CCA APAs

12.   The general APA Statement of Practice at INTM422040 states that HMRC will consider whether the transfer pricing issues are “complex” rather than straightforward when considering an APA request.

13.   HMRC considers the question of whether to accept a party as a valid participant in a CCA to be inherently complex.

The initial contact – the expression of interest (EOI) process

14.   The contact details for an EOI in a CCA APA and for making an application is by email to the BAI Transfer Pricing Team at: cca-apa-mailbox@hmrc.gov.uk.

15.   Where the business has a Customer Compliance Manager (CCM), they should also make the CCM aware of their interest in a CCA APA and send them a copy of the correspondence.

16.   The EOI should cover:

  • A brief explanation of the matters that are covered by the CCA.
  • All relevant legal agreements in respect of the CCA.
  • A narrative explanation of why the business considers the CCA to be commercially viable over the proposed term of the APA at the point of applying for the APA.
  • The term of the CCA and the business’ proposal for the term of the CCA APA.

Term of the agreement and ‘roll-back’

17.   As explained in the APA Statement of Practice at INTM422060, an APA will be operative for a specified period from the date of entry into force as set out in the agreement. The business should propose a term for the APA, taking into account the period over which it is reasonable to assume that the method for dealing with the relevant transfer pricing issues will remain appropriate. Typically, the term is from 3 to 5 years, and a longer term will only be considered in exceptional circumstances.

18.   HMRC considers the development of IP in CCAs may, where appropriate, constitute exceptional circumstances. In certain cases, therefore, a longer APA term, for example a term which matches the term of the CCA, may be appropriate.

19.   HMRC is open to considering whether CCA APAs should cover periods which have already ended, including those which are currently under enquiry by HMRC. In these cases, the CCA APA may be used to narrow the scope of the enquiry. This is contrary to HMRC’s typical approach, where HMRC would typically expect an enquiry to be completed before agreeing an APA.