One aspect often discussed and questioned by tax authorities during audits is whether these rules are actually CCAs or intragroup services (SIRs). While payments must reflect the principle of arm length for both CCAs and IGS, their accounting and tax salaries may vary. Therefore, an erroneous classification of the CCA as an IGS agreement could affect VAT (VAT) and the impact of withholding tax, regulatory authorization requirements and tax deductibility. This issue was thoroughly examined by the Brazilian Tax Coordination Office (COSIT) in the case of CCA Group, which concluded that a transaction involving the CSA between a foreign group and its Brazilian subsidiary was in fact a service provision agreement. The Malaysian tax authorities took a similar approach in the case of Shell People Services, where they redefined the company`s CCA as an IGS agreement and made an adjustment by assigning it an increase. This situation has been challenged in the Malaysian High Court for legal reasons, but makes it clear that tax authorities may, if necessary, tend to look beyond the structure and determine whether the substance and form are inappropriate. In the case of Atotech India, the case was withdrawn by ITAT with management to review the order for in-depth facts and then on its natural arm length. A cost-contribution agreement (also known as a “cost-sharing agreement”) is a contract that allows companies in the same group to share contributions to the development of new products, services or intellectual property rights or to the operation of different companies that make up the group. For there to be a cost-sharing agreement within the meaning of Brazilian tax legislation, the agreement must specify that a cost contribution scheme should include the responsibilities, risks and expected benefits of each party, as well as the allocation of contributions. This latest information is the distinguishing feature of the CCA compared to normal agreements.
To respect the principle of arm length, the contribution of each party at the time of entry into a CCA must be commensuracing with the proportion of the expected benefit. A CCA is a contractual agreement and is not necessarily a stand-alone legal entity or a stable institution for participants. In a CCA, the proportional share of each participant in the overall contributions to the agreement will coincide with the participant`s proportionate share in the total benefits expected under the agreement.