Cost Contribution Arrangements (“CCAs”)

Managing conflicts between domestic laws and adopted international tax guidelines and best practices in Nigeria

The last six years have witnessed significant efforts by Nigeria to align its domestic tax laws and regulations with international initiatives on modernization of its tax principles and enhancement of transparency and disclosure requirements. These efforts included the introduction of Income Tax (Transfer Pricing) Regulations No.1 in August 2012 (“TP Regulations”), which adopted international best practices for determining the arm’s length/market value of transactions between related parties. Nigeria has also been participating in global initiatives aimed at tackling tax evasion and tax revenue leakages.

However, these adopted international best practices and rules may; in some instances, be in conflict with Nigeria’s domestic tax laws, principles and administrative practices, thereby limiting or nullifying the desired effects of the adopted international tax principles.

One of the areas where potential conflicts exist relates to local implementation of the principles and guidelines for determining arm’s length nature of Cost Contribution Arrangements (“CCAs”).

CCAs are defined in the ‘Transfer Pricing Guidelines for Multinationals and Tax Administrators’ as “…contractual arrangements among business enterprises to share the contributions and risks involved in the joint development, production or the obtaining of intangibles, tangible assets or services with the understanding that such intangibles, tangible assets or services are expected to create benefits for the individual businesses of each of the participants.” [Organization for Economic Cooperation and Development, July 2017, Pg. 345] (“OECD TP Guidelines”). CCAs are classified into either Development (for the joint development, production or the obtaining of intangibles or tangible assets), or Service (for the joint procurement of services) CCAs.

While CCAs represent sharing of resources to achieve a common goal, each participant’s contribution should still be at arm’s length – consistent with the benefits they expect to derive from the arrangement. Hence, to aid in verifying arm’s length terms, OECD TP Guidelines recommend inclusion of certain information in any CCA, such as list of the participants, the nature and extent of each participant’s expected benefit from the underlying activities, the cost allocation/ contribution mechanism, arrangements for monitoring the operations of the CCA, etc

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