EUROPEAN TAXATION AUGUST 20C Probably the most remarkable change to the April draft charge the services in question. The maindifferenc. from a practical point of view was the abandonment of an between the two altematives may be seen in the applica explicit profit margin for the provision of services from a tion of a profit mark-up. While any transaction charged nally, the draft stipulated in Paragraph 1. 7 that a mark-up arm's length remuneration (i.e. a mark-up); the new guide of 5% would be common practice and in accordance with lines basically only allow the recovery of costs for services 's length standards if charged by a foreign service rendered between the parties to a cost-sharing agreement provider. Comments on the draft nightly criticized this margin as being inconsistent with other tax administration The question of profit mark-up leads again to the pool con- 5% to 10% margin was mentioned for services provided to pool concept it may now be regarded as formingthe con- been included in the final version, it may, together with the participants of the cost-sharing scheme replace a market res, serve as a first indication of a cost-plus mar- transaction by setting up an association or-in economic g that would usually be acceptable to the tax tems -an institution. In economic theory, such behaviour author explained by the transaction cost approach, In legal terms the pool members form something like a civil The extent of the change between old and new rules can law partnership(BGB-Gesellschaft) 1 However, this insti already be indicated on a purely formal level if one com- tution or association is not recognized as a partnership for pares the number of paragraphs that are included in the tax purposes. 13 respective texts. While in 1983 fourteen paragraphs seemed to be sufficient to cover the topic, the 1999 guide From the tax administrations point of view, the denial of doubled in size. The old text consisted of four main chap- the refusal of a profit mark-up by supporting the argument ters dealing with the definition and scope of the guide wetly the only profit element that may be charged l lines, the content of cost-sharing agreements, the fulfil- ited to a portion of the cost of the equity capital employed ment of these agreements, and basic documentation equirements. The new guidelines consist of eight mai by the bers in rend bering services within the pool parts, covering not only the above but also paying special Obviously this profit would have to match comparably attention to, for instance the determination of the alloc- small returns on low-risk investments. In fact the new able amount the allocate d special issues such as late entry or early withdrawal. rules stipulate that the respective capital market interest rate for deposits must be applied. The denial of profits mong the cost-sharing arrangements participants would DEFINITION OF COST-SHARING thus fit neatly into the rationale of a profit-free service ARRANGEME flow within a single institution. Besides, payments under the cost-sharing arrangement could be replacing own costs of the service recipient, for which in turn an additional mark-up would not be applicable. ally admitted cost-sharing arrangements for research and Obviously, the above would lead to inappropriate results development costs as well as for the costs of intra-grou in cases where companies devote substantial parts of their administrative services. However, the application of qual- activities to the pool, at costs that otherwise could have ified agreements used to be limited to situations in which demanded a profit-bearing market price in transactions only a uniform assessment of the services was possible or with third parties. The new cost-sharing guidelines avoid if it was difficult to ascertain the costs incurred to the, such a situation in two ways. First, they only allow auxil- iary activities to be conducted within the cost-sharing for both R&D and non-R&D activity. According to the provides must not make up the majority of its economic general definition in Paragraph lI of the new guidelines, activit a cost-shaning arrangement is an agreement that is entered However, the new guidelines do not provide a ing cross-border in order to jointly obtain or produce 8. Administrative Principles, Para. z. .chnachnichten 8(1999), at 385 assets, services, or rights for the parties 'mutual benefit. In 9. See Alexander Vogele and Unf Freytag, "Kembereiche der peven pru loing so the parties to the agreement become members of 240gsgrundsatze zu Kostenumlagen", 9 intemationales Steuerrecht&(2000, a cost-sharing pool. The pool concept is explicitly men 10. Administrative Principles, Para. 7.1.2. tioned in the new guidelines and is central to an under-11. See Ronald HCoase,"The Nature of the Firm",in4Economica(1973),at standing of the guiding principles of the new rules 390 et seq. For an example of an application of the transaction cost approach to ng, see s Compared to the past situation, there seems to be a signif- Sharing: An Economic Ap ntly broader scope to employ qualified cost-sharing 12. See Amdt Rapa arrangements. Because the former restrictions to cases Gewinnaufschlag im Hinblick auf die Organisation multinational er k oder obn with specific valuation problems no longer exist, tax payers in fact have the option to either structure their 13. New Cost Sharing Guidelines, Para.1.1 transactions as cost-sharing arrangements or to separately 15. New Cost Sharing Guidelines, Para.2. - 2000 International Bureau of Fiscal documentation