Transfer pricing offers a context in which multinational groups attempt to maximize their economic and organisational efficiency. In this context, the legal figure of cost-sharing or cost contribution agreements was first addressed in the OECD 2010 Transfer Pricing guidelines. Cost-sharing agreements may offer an advantage in terms of reducing the VAT costs incurred in reciprocal services provided in a group setting, in accordance with binding ruling V2746-20 from the Spanish Directorate of Taxes.
According to OCDE guidelines, a cost-sharing or cost contribution agreement ("CCA") is "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 business of each of the participants". Such a contractual arrangement must comply with the minimum content requirements under the Spanish Corporate Income Tax Regulations and should be entered into in accordance with the arm's length principle. The European Union Commission Communication from 19 September 2012 on transfer pricing provides that a CCA complies with this principle, when the contributions from each participant in the framework of the agreement are consistent with the contributions that would have been carried out by independent enterprises in comparable circumstances.
An example of the application of a CCA is described in binding ruling V2746-20. The facts at hand relate to two Spanish branches belonging to the same insurance group, the structure of which is such as to not make it possible to create a Spanish VAT grouping. Both branches are considering entering into a CCA, in accordance to which they will share services necessary to carry out their insurance services with third parties: such as actuarial services, services for the processing of claims, risk management services, etc. Initially, both participants will carry out services which they will share in proportion to the expected benefit under the CCA. Should the initial contributions and the final benefit not align, the CCA provided for a series of compensation payments by way of adjustment between the parties.
The Guidelines have contemplated such compensation payments, which ensure an equitable distribution of the profit obtained and, as such, are a way to guarantee compliance with the arm's length principle. As an example, one branches may provide services in the context of a CCA and the value of such services may be below the real benefit the branch derives from the agreement (as compared to the benefit the branch was expecting to obtain). In this case, the branch would be obliged to pay a compensation to the other branch, with a view to redressing this imbalance. The participant paying such compensation would incur in an extra cost, whereas the participant receiving such compensation would receive a reimbursement of its own costs.
A distinction must be drawn between a CCA entered into by various participants and a situation where a particular service function is centred in a group entity. On the one hand, a CCA involves participants putting services in common with a view to sharing the costs and obtaining the corresponding portion of the profit created. On the other hand, centralising services in a group entity entails that such entity renders services solely for the benefit of the recipient. Should there be several entities receiving the service, the associated cost should be divided up amongst them in accordance with specific cost-sharing rules.
Regardless of how these agreements may be structured, intragroup services are subject to VAT, provided they are rendered for valuable consideration in accordance with article 4 of Spanish VAT law. In this context, binding ruling V2746-20 establishes that
- Reciprocal services in proportion to each participant's contribution under the CCA cannot be deemed to be made for valuable consideration, and as such are not subject to VAT;
- However, compensation payments to adjust the benefits obtained by each of the participants, in relation to the value of the services provided, would amount to valuable consideration for the services rendered and would be subject to VAT. Therefore, the branch receiving the compensation payments should charge VAT at the general 21% rate.
Under the ruling, only the excess over the value of each of the services (compensation payments) should be seen as consideration for the VAT purposes. This manner of construing consideration and compensation had so far been rejected by legal scholars.
With a view to leaving these transactions outside of the VAT remit, the Spanish Directorate of Taxes refers to European precedent (rulings dated March 3 1994, Tolsma, case C-16/93, and April 27 1999, Kuwait Petroleum, Case C-48-97).
This view implies that, in practice, any entity with a limited right to claim back input VAT, due to the fact that this entity carries out VAT-exempt activities (such as insurance), would not bear additional costs derived from VAT on these reciprocal services, or at least should be able to limit such cost to the amount of the compensation payments, by entering into a CCA.
Although courts or other administrative bodies are yet to state their positions, the view from the General directorate of Taxes is clear and makes these contractual arrangements a useful tool for the tax planning of groups.