Cost Sharing Agreements (CSAs), also known as Cost Contribution Arrangements (CCAs) or Cost Sharing Agreements (CSAs), are among the most sensitive structures in terms of transfer pricing. Their correct implementation requires evaluating not only the allocation of costs between related parties, but also the economic consistency between (i) the contributions made, (ii) the risks actually assumed and controlled, and (iii) the expected benefits of the project.
In practice, these agreements are often used in cross-group initiatives—especially in intangible development projects—and are therefore a recurring focus of review by tax authorities. Unlike an intragroup service, in a CSA each participant seeks to obtain a right to exploit the results of the project and shares, under arm’s length parameters, the economic effort necessary to achieve this.
What are Cost Sharing Agreements and when are they used?
A Cost Sharing Agreement is a contractual agreement whereby two or more entities within a group agree to share contributions (in cash or in kind) and certain risks associated with a joint project, with the expectation of obtaining their own benefits from the exploitation of their rights to the outcome. Each participant exploits its rights separately (for example, in its territory or line of business), without this necessarily implying joint exploitation or direct sharing of income.
This type of arrangement is often used, for example, when a group jointly develops software, a technology platform, an algorithm, know-how, or any other intangible asset, or when it coordinates corporate services that generate measurable benefits for several entities.
Distinction between service CSAs and intangible CSAs
Chapter VIII distinguishes between two main types of cost contribution arrangements:
- Service CSAs: their purpose is to pay for services that benefit the participating parties. They typically generate present or immediate benefits and are therefore easier to link to the contributions made.
- Intangible or development CSAs: these are aimed at the development, production, or acquisition of intangibles or long-term assets, whose expected benefits may materialize in future periods. This type of CSA involves a higher level of uncertainty and, consequently, requires more robust mechanisms for valuation and evidence of expected benefits.
This contrast is crucial because, in development CSAs, benefits do not always translate immediately into financial results and may be subject to significant variations depending on the technological or commercial success of the project.
Alignment of contributions with expected benefits
The underlying principle of Cost Sharing Agreements in the OECD guidelines is that each participant should contribute in proportion to the economic benefits it expects to receive from the joint project. This proportion is not always measured simply by the costs incurred; it may require a more comprehensive assessment that considers the productive capacity, exploitation rights, and functional position of each entity.
For example, in a CSA to develop new software that will benefit several jurisdictions, an entity with a larger market presence or greater technical capacity may be required to make a larger contribution, with the expectation of receiving a proportional share of the future revenues generated by that technology.
If, when analyzing the contributions of each party, there is no consistent correlation with the expected benefits, the OECD guidelines suggest that a correction should be applied through balancing payments to realign the contributions with the economic expectations of each participant.
DEMPE considerations in Cost Sharing Agreements related to intangibles
Although the DEMPE analysis—which evaluates the functions of Development, Execution, Maintenance, Protection, and Exploitation of intangible assets—is specifically addressed in other chapters of the guidelines, its logic is relevant when considering CSAs for long-term intangibles. When intangible assets are developed jointly, the allocation of rights and the valuation of contributions must take into account which entities actually perform substantive DEMPE functions on those assets, as this influences the expectation of benefits and compliance with the arm’s length principle.
This connection is particularly important in projects where complex intangibles (e.g., specific know-how or technologies that are difficult to value) are at stake, as mere financial participation without functional evidence can weaken the CSA’s defense before a tax administration.
Documentation and evidence requirements
An essential part of any Cost Sharing Agreement that aspires to be defensible in transfer pricing audits is comprehensive documentation supporting the expectation of benefits and the proportion of contributions. This includes not only the text of the agreement, but also functional analyses, economic projections, role descriptions, evidence of execution, and review mechanisms.
The OECD guidelines emphasize that the documentation should allow for an assessment of whether the CSA complies with the arm’s length principle, describing who the participants are, the scope of the activity, how the contributions were measured, and how each party is expected to exploit the results.
A conceptual example may clarify this: if a parent company and its international subsidiary agree to share the costs of an R&D project for a new technology, the evidence must demonstrate not only that both parties contributed financially, but also that they actively participated in relevant functions (such as technical design or project management), that the technology has expected benefit potential for each, and that the methodology for calculating contributions and benefits is consistent with what independent companies would do.
Risks of poor implementation
When a Cost Sharing Agreement is not structured with technically defensible criteria—that is, if the proportion of contributions is not clearly related to the expected benefits or if the evidence of execution is insufficient—there are significant tax risks. These include:
- Re-characterization of contributions as simple payments for services rather than full participation in joint benefit projects.
- Transfer pricing adjustments, which may generate additional tax liabilities.
- Denial of the deductibility of certain contributions if they are interpreted as not reflecting market conditions.
The absence of adjustment or true-up mechanisms to correct imbalances between projected contributions and actual benefits often exacerbates these risks in audits.
Technical structuring and specialized support
The proper structuring of Cost Sharing Agreements requires a comprehensive approach that combines economic analysis, regulatory understanding, and in-depth knowledge of the OECD Guidelines. Having a company specializing in transfer pricing allows these agreements to be evaluated from a preventive perspective, identifying potential risks and aligning contributions with expected benefits in a technically defensible manner.
TPC Group advises business groups on the review and structuring of complex intercompany agreements, including Cost Sharing Agreements, ensuring their consistency with international arm’s length standards. This support is key to strengthening the group’s tax position and reducing contingencies in increasingly demanding tax audit contexts.
Source: OECD