Cost contribution agreement example

CHAPTER VII - Cost Contribution Arrangement (CCA)

A CCA is a framework (in the form of contractual agreement) 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. 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. The participant would be entitled to exploit its interest in the CCA separately as an effective owner, not as a licensee. Where a taxpayer enters into a CCA with its associated persons, the arrangement should reflect that of an arm's length arrangement.

There are two major types of CCA most commonly encountered in practice:

Arrangement for the joint development of intangible property

Example 1

Three members of a multinational group, marketing a product in the same regional market where consumers have similar preferences, want to enter a CCA to develop a joint advertising campaign. A fourth member of the group helps develop the advertising campaign but does not itself market the product. This fourth member is not a participant in the CCA because it does not have any beneficial interest in the services subject to the CCA activity and would not, in any case, have a reasonable expectation of being able to exploit any interest. The three participants in the CCA would, therefore, compensate the fourth member by way of an arm's length payment for the advertising services provided to the CCA.

7.3.1 To demonstrate whether a CCA accords with an arm's length arrangement in comparable circumstances, the following matters should be addressed

CCA should be entered into with prudent and practical business judgment with a reasonable expectation of its benefits. An independent party would not enter a CCA where the value of the contribution exceeds the expected benefit. Estimation of the expected benefit to be derived from the arrangement can be computed in the following manner:

Based on the anticipated additional income that will be generated or the expected cost savings; or

7.3.2 Consideration for the entry, withdrawal and termination of a CCA should be dealt with at arm's length, as follows:

Where a participant's contribution is not consistent with its expected share of benefits from the CCA, a balancing payment may be required between the participants to adjust their respective contributions;