Release of Pillar One Amount B report

On 19 February 2024, the OECD/G20 Inclusive Framework (“IF”) on BEPS released its report on Amount B of Pillar One intended to simplify transfer pricing aspects of baseline marketing and distribution activities, alleviate administrative burden, cut compliance costs, and enhance tax certainty.

Although IF members’ work on Amount B is still ongoing with further information to be released later in 2024, certain sections of the report have already been integrated in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 as an Annex to Chapter IV.

Scope of Amount B

Under Amount B the following transactions are considered as “Qualifying Transactions”:

• Buy-sell marketing and distribution transactions where the distributor purchases goods from one or more associated enterprises for wholesale distribution (i.e., distribution to any type of customer except end consumers) to unrelated parties; and
• Sales agency and commissionaire transactions where the sales agent or commissionaire contributes to one or more associated enterprises’ wholesale distribution of goods to unrelated parties.

These “Qualifying Transactions” are then subject to two further scoping rules:

• The qualifying transaction must exhibit economically relevant characteristics: it can be reliably priced using a one-sided transfer pricing method, with the distributor, sales agent or commissionaire being the tested party.
• The tested party in the qualifying transaction must not incur annual operating expenses lower than 3% or greater than an upper bound of between 20% and 30% of the tested party’s annual net revenues.

Further exclusions apply where the qualifying transaction involves the distribution of non-tangible goods, services or the marketing, trading, or distribution of commodities or the tested party carries out non-distribution activities in addition to the qualifying transaction, unless the qualifying transaction can be adequately evaluated on a separate basis and can be reliably priced separately from the non-distribution activities.

Further qualitative criteria are being developed and shall be released by 31 March 2024.

Amount B as the simplified and streamlined (“S&S”) approach 

The determination of the arm’s length remuneration for transactions in scope is made under the S&S approach: 

• Transfer pricing method: the transactional net margin method (“TNMM”) shall be applied to transactions in scope without any further justifications or analysis of other transfer pricing methods. The report acknowledges that in certain cases the comparable uncontrolled price method using internal comparables might be more appropriate and shall be used in due place.
• Determination of the arm’s length return under the S&S approach: a pricing matrix is provided by the report to determine the arm’s length return based on the tested party’s industry (divided in three groups), operating expense intensity and operating asset intensity. A 0.5% tolerance applies.
• Profitability adjustment: two control points shall apply that can lead to an adjustment, (i) the return on operating expenses that is checked based on a predetermined cap-and-collar range and (ii) a specific adjustment, based on a specific formula provided by the report, which applies for qualifying jurisdictions (list to be published) where relevant data is insufficient.
• Documentation: taxpayers shall maintain a certain level of information (though their local file where applicable): explanation on delineation of qualifying transaction (including functional analysis and context), written contract or agreements supporting the delineation, relevant calculations, connection between financial data used and financial statements. Provision of such information should not prevent tax authorities to review taxpayers’ self-assessment. Upon first application of the S&S approach, taxpayers should provide relevant tax authority with a consent to apply the approach for a minimum of 3 years (unless transactions are no longer in scope during that period).
• Tax certainty and elimination of double taxation: the report contains further information on Mutual Agreement Procedure (“MAP”) where a corresponding adjustment cannot be provided under domestic legislations. Notably where one of the jurisdictions involved has chosen to not apply the S&S approach, taxpayers and jurisdictions involved shall justify their positions under the OECD TPG without relying on the S&S approach during the MAP process. Agreements pertaining to a Qualifying Transaction already in place before implementation of the S&S approach would continue to be valid (under Article 25 of the OECD MTC, APAs or MAPs).

A non-binding mechanism

The S&S approach is not mandatory for countries including IF members and jurisdictions choosing to implement the S&S approach can either grant the possibility to use such approach or require taxpayers to mandatorily apply the approach for transactions in scope.

The outcome determined under the S&S approach in a jurisdiction choosing to apply the approach is non-binding on the counterparty jurisdiction. However, members of the IF members committed to respect such outcome when applied by a low-capacity jurisdiction (list to be issued).

Conclusion

Although the scope of Amount B is limited to Qualifying Transactions, it does not set a minimum revenue threshold for taxpayers to fall in scope. The list of countries applying the S&S approach should be monitored notably for those electing a mandatory approach. Further work is ongoing at OECD level notably regarding the qualitative criteria for scoping purposes, update of Article 25 of the OECD MTC, competent authority agreements to be used in the context of double tax treaties and relationship between Amount B and Amount A under Pillar One.