AUGUST 2000 EUROPEAN TAXATION clear yardstick for determining when an auxiliary activity situations where a profit mark-up for the services rendered Is no longer auxiliary. An analysis of comparable returns to the pool would have to be seriously considered in light on assets might offer the first indication in this respect. of arm,s length aspects Second, the guidelines try to keep the pool members as homogeneous as possible and seek to admit only pools of equals. This issue is analysed below. SIGNIFICANCE OF ANALYSIS OF COSTS AND BENEFITS MEMBERSHIP IN COST-SHARING ARRANGEMENTS It is partly claimed in the literature that the most prominent hanges in the new rules apply to the allegedly new bene fit analysis. Though it' is true that more text has been Under the new guidelines, participants in a cost-sharing devoted to the subject, one might question if there hay pool must be pursuing similar interests. With this concept been changes in essence. The old rules simply stated that if OECD rules. The old guidelines did not contain an explicit under the agreement. z Also, the old rules stipulated that referred to the cost allocation among members of one necessarily reflect their relative benefits under the cost- roup of companies. In this regard, two partly offsetting sharing scheme. 23 Taking this into account, even under the effects can be observed On the one hand the new guide- old rules some kind of benefit analysis would have bee lines increase the potential scope of cost-sharing arrange- necessary to determine the proper allocation key even costs would generally be possible, while, on the other nent review thereof was not required on and the perma- hand, the number of eligible members is restricted. The new set of rules stipulates that costs are to be allocated The question to be solved now is how the term similar on the basis of the benefit that each pool member may interest"can be defined on an operational level. The expect. The rules provide for the direct or indirect mea- guidelines suggest that benefits may take the form of cost surement of the anticipated benefits Measured on a direct wever, it is stipulated basis, the anticipated benefit would be determined by the that only parties that use services from the pool in an eco- amount of additional income generated or costs saved. If nomically identical way qualify for participation in the such a direct approach is not possible, an indirect mea- cost-sharing scheme. From the explanation, it appears surement of the benefits that would approximate the distri- at an economically identical use would mean that the bution of the anticipated benefits among the grude est- rties show a high degree of similarity in their interest in could be used. Examples in the guidelines includ pants anticipating in the respective pool. That would suggest mated units used, produced, or sold; sales; and operating similar benefits from their participation in the cost-sharing. such as the number of employees, the wage total, and arrangement. It would not be sufficient that their benefits invested capital can be measured reliably in a currency amount, but they However, the method used for measuring anticipated ben- would also have to stem from a comparable source(e.g. efits must be the most reliable measure thereof. The new either increases in licence income or reductions of admin- Principles stress that the allocation key (i. e the anticipated istrative costs). benefits)must be the most objective one in the individual This is also supported by the examples provided in the text case. Only if several keys appear to have the same qualit of the new guidelines. The tax authorities now explicitly is it at the discretion of the taxpayer to select a key. in deny that a patent-exploitation company may join an r&d other words, it is implicitly assumed that the best method pool of manufacturing companies, since the interests of a for measuring the anticipated benefits can be objectively rom those of a manufacturing company. The same The reliability of the benefit projections must be verified applies for combinations of production companies and at regular intervals and adjusted if necessary. An adjus holding companies. 20 In fact, such combination may cause e ment becom cessary if there have been material single holding company may participate in an r&d pool changes. In contrast to the us regulations for instance From an administrative point of view, smaller pools can be managed more easily. All things being equal, an increase in the number of members will increase the tax-motivated 17.. New Cost Sharing Guidelines, Para. 1.1. costs of the participating parties. Also, combinations of 18. New Cost Sharing Guidelines,Para.1.2. production and distribution companies might now be more 19. New Cost Sharing Guidelines, Para.1.2. 21. See Alexander Vogele and Christian M. Scholz, "Nutzen-Analyse im rab- As indicated above, the similarity of interests that is hr5(200),at155 required will lead to a rather homogeneous composition of 22. Administrative Principles, Para. 7.4.1, No I participants in cost-sharing arrangements, thus avoiding 23. Administrative Principles, Para.7.2.1.No. 4 2000 International Bureau of Fiscal Documentation