Cost contribution agreements: The South African tax implications of research and development costs incurred by multinationals participating in joint research projects with offshore associates

Cost Contribution Agreements (CCAs) or cost sharing of research and development costs, is one of the vehicles sanctioned by tax authorities that may be used by multinational enterprise groups (MNEs) to develop and distribute intangible property among members of the group. Such an agreement, which is often used as an international tax planning mechanism, may provide a solution to the challenge of determining a transfer price for the cross-border transfer of rights to intangible property between connected entities, thereby avoiding double taxation, limiting transfer pricing uncertainty and transfer pricing risk, as well as providing the planning opportunity for MNEs to potentially reduce their global tax liability.Although CCAs have been used in international tax planning for a considerable number of years by MNEs, the South African legislative tax framework, unlike some international tax systems, does not make specific provision for the regulation of CCAs. The purpose of this study is therefore to consider the concept of CCAs, and to critically evaluate, within the current South African regulatory framework, the potential application of CCAs for South African taxpayers, with specific reference to the deductibility of CCA costs incurred. Although CCAs that are well planned and structured may provide tax planning opportunities, South African taxpayers face unique planning challenges, since the income tax deduction regime in respect of research, development and intangibles may potentially discourage participation by South African resident taxpayers in joint research and development initiatives such as CCAs.