On January 31, 2020, Decision No. 1401-004.049 in Section 1. Judgment of the 4th Chamber and the 1st Ordinary Chamber of the Board of Directors for Tax Complaints (CARF) was published, which established the impact of withholding tax (IRRF) in the case of payments to legal persons established abroad on the basis of cost-sharing agreements, also known as cost-sharing agreements. The critical point is that this required membership payment does not help reduce the relevance of the cost-sharing agreement. In the absence of a cost-sharing agreement, the subcontractor would be required to make an annual payment of $30 million to the parent company for the subcontractor`s revenues generated by the parent company`s intangible assets prior to membership. Given that the current value of these payments is $300 million. USD, which is the same amount as the buy-in payment, is the total value (present value) of the payments made by the Sub in relation to these intangible assets prior to the buy-in, whether or not the parent company and sub-company have entered into a cost-sharing agreement. Since it reduces post-buy-in payments from the subcontractor to the parent company, regardless of the subcontractor`s obligation to make the buy-in payment, the attractiveness of the cost-sharing agreement remains. The cost-sharing agreement usually results from the need for optimization, efficiency, cost reduction and performance standardization. In a group of companies, a parent company or a company created specifically for this purpose (Shared Service Center) may agree on the cooperation of certain aspects. This may include, but is not limited to, sharing expenses and costs arising from non-core business activities such as accounting, marketing and legal services, as well as research and development. Cost-sharing agreements are inter-company cooperation agreements established to ensure the correct sharing of costs between different legal entities but belonging to the same economic group in order to determine the allocation of expenses and costs resulting from the exercise of joint activities such as internal accounting, communication, legal and administrative services. Table 1 illustrates the differences between service agreements and cost-sharing agreements.
While people naturally tend to get bored with tax issues and especially transfer pricing when a company increases its global tax payments by 80% ($10 million vs. $50 million). USD) by replacing a traditional transfer pricing policy with a cost-sharing system, it`s a pleasure! (iii) service contracts (there is often remuneration with a profit margin, whereas in cost-sharing agreements there is no right to profit, only reimbursement). Although the nature of these contracts is under discussion, it is possible to determine at least three different types depending on the structure established between the parties: (i) cost-sharing agreement; (ii) intra-group services agreement; and (iii) Cost Contribution Agreement. Therefore, one of the companies will be able to centralize these activities by supporting the other organizations in the group, thus establishing a cost-sharing between them, as the implementation of these support activities will ultimately benefit all parties involved. The basic tax advantage associated with cost-sharing agreements is that (estimated) market prices are replaced by the costs incurred. To elaborate on this point, suppose that a company consists of two departments, a parent company and a sub-company, and these two departments enter into a cost-sharing agreement. The parent company then develops an intangible asset – for example, a patent on a product that can be sold by both departments. Given the cost-sharing agreement, the subcontractor must pay the parent company a fraction of the cost of developing the patent, the share being determined by the relative benefit of the patent for the parent company and the sub-enterprise.
If, on the other hand, no cost-sharing agreement had been concluded, the submarine would have to pay a royalty to the parent company for each unit of the patented product that sells the submarine, the royalty being equal to the estimated market value of the license to sell the patented product. Royalty payments from the submarine to the parent company (under the transfer pricing agreement) and the subcontractor`s share of costs to the parent company (under the cost-sharing agreement) constitute taxable income for the parent company and are tax deductible for the parent company. Thus, if the parent company operates in a higher tax jurisdiction than the subcontractor and the cost of developing the patent is lower than market-based royalty payments, the company could reduce its global tax liability by implementing a cost-sharing agreement instead of introducing royalty-based transfer pricing. (iii) the amount paid in respect of such expenditure would be deductible provided that: (a) it is demonstrated that it is habitual, regular and necessary; (b) they are calculated in accordance with appropriate and objective evaluation criteria previously agreed by the parties; (c) to pay the actual costs of each undertaking for the provision of those services or goods; (d) the centralising undertaking bears only the costs to which it is entitled; and (e) – there is control over these joint expenses and reimbursements. In addition to deductibility for the purposes of the IRPJ and the CSLL, the same reasoning would also allow the company to offset the PIS and COFINS credits in the non-cumulative regime. It can be concluded that federal revenues do not have a clear guideline against the non-taxation of remittances abroad when it comes to a cost-sharing agreement. .