(vol.8,No.23) .23)1001 trative principles, but also proposed a st on and incorporation of elements of the Ithough OECD guidelines and German administra es rega ding cost contribution tive principles are similar in scope, one marked differ Chapter Vill of the OECD guidelines-which ence is stressed in the german tax literature while the September 1997. ECD neatly separates the two different type aring arrangements in two different paragr markup of 5 percent would be common practice and in one definition. It is sometimes maintained that foreign service provider. Comments on the draft rightly to inappropriate results in analyzing whether or not a eait icizmd this margie as be ing inconsistent with other profit m吧 must be charged within the pool from a tablishments, in which a 5 to 10 percent margin was The question of profit markup leads again to the pool ent& Though the 5-percent benchmark has not been in- sharing scheme replace a market transaction by setting luded in the final version it may, together with the other figures, serve as a first indication of a cost plus might be explained by the transaction cost approach, s margin range that would usually be acceptable to the In legal terms the pool members form something like a German tax authorities civil law partnership ( BGB-Gesellschaft) 14 However, as Definition and Scope under the U. S regulations, this institution is not recog Of Cost Sharing Arrangements nized as a partnership for tax purposes. From the rman tax administrations point of view the denial of Under U.s. regulations a cost shari market transactions has another consequence. The ger- man guidelines generally prohibit, a markup an agreement under which the parties agree to share the costs of developing one or more intangibles, in pro- risks. I. The only profit element that may be charged is ests in the resulting intangibles. If the arrangement is respective capital market interest rate for de- a qualified cost sharing arrangement, each participant posits:. 7 The denial of profits among the cost sharing Thus the issue whether the pricing of the license is the rationale of a profit-free service flow within asing arm’ s length car The U.S. definition is much more restrictive than ei institution. Besides, payments under the cost: sharing arrangement could be interpreted to replace own costs ther the definition included in the OECd guidelines or of the service recipient for which in turn an additional the new German definition. Under the OECD guidance markup would not be applicable a potential cost contribution arrangement may cover a Obviously, the above would lead to inappropriate re- wide range of joint activities. In fact, the oEcd de- sults in cases where companies: would devote: substan scribes two different types of arrangements. The first tial parts of their activities to the pool at costs that oth type is consistent with the U.s. regulations in that it in rwise could have demanded a profit-bearing market nce in transactions with third parties. The german cording to the OECd is the most common type of cost principles avoid such a situation in two ways. First, they would inclu nly allow auxiliary activities to be conducted within joint funding or sharing of costs and the cost sharing, arranovides must not make up the ma- risks, for developing or acquiring property or for ob- dvertising cam jority of its economic activity. However, the principles do not provide a clear yardstick to decide when an aux w German iliary activity is no longer auxili principles also allow cost sharing arrangements for parable returns on assets might n analysis of com- er the first indication eral definition in para. 1.1 of the German cost sharing keep the pool members as. homogeneous as and seek to admit only pools of equals. This issue is Into for lated parties operating crossborder to jointly obtain or roduce assets, services, or rights for the parties'mu- tual benefit. In doing so the parties to the agreement be- w-Fachnachrichten 8/1999, p. 383. f Coase, The Nature of the R&D Cost Sharing: An Economic Approach. in Intertax voL. 25(1997).p. 419 sung von Konzen oder ohne Gewinnaufschlag im Hinblick auf die Link of Allocations to Expected Benefits"(6 Transfer pricing 1990, p 2. 400 Report340,351,10/1/97 。Res:514827(18199p.385 5 Para. 1.1 Cost Sharing Principles and Regs. 51.482- 7(a)1 CD guidelines, chapter VIIl, para. 6. 6 Para. 2.2 Cost Sharing Principles OECD guidelines, chapter VIIl, para. 7. 18 Para. I 1 Cost Sharing Principles X MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069 TM32200