On 19 February 2024, the OECD/G20 Inclusive Framework on BEPS released the report on Amount B of Pillar One, which provides a simplified and streamlined approach to the application of the arm’s length principle to baseline marketing and distribution activities, with a particular focus on the needs of low-capacity countries. Content from the report has now been incorporated into the OECD Transfer Pricing Guidelines as an Annex to Chapter IV, and taxpayers may apply the simplified and streamlined approach for fiscal years commencing on or after 1 January 2025.

Overview

Amount B is a crucial component of Pillar One aiming to simplify the existing transfer pricing rules, as set out in the OECD Transfer Pricing Guidelines (OECD Guidelines), for all taxpayers. The focus of Amount B is on applying transfer pricing rules to baseline marketing and distribution activities, which are likely the most common situations multinational enterprises (MNEs) come across in the jurisdictions where they do business.

Transactions in scope

The simplified and streamlined approach may be applied to the following qualifying transactions:

• Buy-sell marketing and distribution transactions where the distributor purchases goods from one or more associated enterprises for wholesale distribution to third parties
• Sales agency and commissionaire transactions where the sales agent or commissionaire contributes to another group entity’s wholesale distribution of goods to third parties

An accurate delineation of the qualifying transaction should be in accordance with Chapter I of the OECD Guidelines. Once the qualifying transaction has been accurately delineated, MNEs will need to determine whether the transaction is considered an in-scope transaction based on the Amount B scoping criteria. The Inclusive Framework does not provide an exhaustive list of baseline marketing and distribution activities, but recognizes that distributors should perform the following set of core functions in relation to the in-scope transactions:

• The qualifying transaction must exhibit economically relevant characteristics confirming that it can be reliably priced, using a one-sided transfer pricing method, with the distributor, sales agent or commissionaire being the tested party, i.e., the simpler party to be tested under the transfer pricing rules, commonly but not exclusively using the transactional net margin method (TNMM)
• The tested party must not incur annual operating expenses lower than 3 percent or greater than the upper bound of between 20 percent and 30 percent of the tested party’s annual net revenues. Local jurisdictions will separately specify the upper bound.

Qualifying transactions which are not out of scope based on the application of the scoping criteria are deemed to be out of scope if:

• The qualifying transaction involves the distribution of intangible goods, services or the marketing, trading or distribution of commodities; or
• The tested party carries out non-distribution activities (e.g., manufacturing, R&D) in addition to the distribution activities, unless the qualifying transaction can be adequately evaluated and priced separately from the non-distribution activities.

Applying the most appropriate method to in-scope transactions

The TNMM is considered the most appropriate method for pricing in scope transactions. An exception is provided, where applying the comparable uncontrolled price (CUP) method, using internal comparables, could be potentially more appropriate to apply to price in scope transactions.

Determining the return

The framework used common benchmarking search criteria, additional screening and a quantitative review to develop a global dataset of companies involved in baseline marketing and distribution activities. The information from this dataset has in part formed the basis of the approximation of arm’s length results, which has been translated into a pricing matrix. Businesses will determine the arm’s length return for in-scope transactions by selecting the relevant segment of the pricing matrix that corresponds to the business’s following of the three-step process:

• Step 1 – determine the tested party’s relevant industry grouping — provided the industry was determined to have a notable correlation with return levels — from three possible groupings
• Step 2 – determine the relevant factor intensity classification of the tested party from five possible classifications based on net operating asset intensity (OAS) and operating expense intensity (OES)
• Step 3 – identify the range of the pricing matrix that corresponds to the intersection of step 1 and 2

For purpose of the simplified and streamlined approach, an operating expense cross-check is applied as a guardrail within which the primary return on sales net profit indicator is applied. In the result falls outside the pre-defined operating expense range, the profitability of the tested party will be adjusted.

Furthermore, a data availability mechanism could be used for entities in countries where there is insufficient data in the global dataset, but evidence exists of country risk that may influence the arm’s length return. The OAS (capped at 85 percent) will then be multiplied by a specified percentage on a country basis.

Documentation requirements

Businesses with transactions within the scope of Amount B will be required to provide additional information to tax authorities as part of the transfer pricing local file, including a reconciliation of how applying the simplified and streamlined approach ties to annual financial statements.

Tax certainty

Where disputes arise between businesses and tax authorities in relation to the application of Amount B, existing tax dispute prevention and resolution mechanisms will apply, including advance pricing arrangements and mutual agreement procedures. A mutual agreement procedure or bilateral advance pricing agreement reached before Amount B is adopted will take priority for in-scope transactions.

Implementation

The inclusion of the Amount B guidance into the OECD Guidelines is accompanied by conforming changes to the Commentary on Article 25 of the OECD Model Tax Convention and is interdependent of the signing and entry into force of the Multilateral Convention to Implement Amount A of Pillar One. The conforming changes signpost specific language related to tax certainty and the elimination of double taxation included in the report on Amount B and are intended to ensure optionality is preserved in all dispute-resolution mechanisms for non-adopting jurisdictions.

Key takeaways

The aim of the report on Amount B is to simplify administrative processes and increase tax certainty for taxpayers. It is unclear whether the new guidance will achieve these objectives.

First, the application of Amount B is optional, and jurisdictions may choose to apply the simplified and streamlined approach for in-scope transactions of tested parties in their jurisdictions. As a result, situations may arise in which taxpayers are required to apply both the simplified and streamlined approach as well as the current arm’s length principle, increasing the administrative burden for individual taxpayers.

Furthermore, it is unclear how the adoption of Amount B in the OECD Guidelines provides the taxpayer with increased tax certainty. Based on the current state of implementation it may even lead to decreased tax certainty, as disputes may arise if one jurisdiction has adopted the simplified and streamlined approach whereas the jurisdiction of the counterparty did not. Moreover, the outcome is non-binding on counterparty jurisdictions that do not discourage jurisdictions to disagree on the local margins achieved.

Third, the guidance on applying the most appropriate method to in scope transactions refers to exceptions where an internal CUP is considered a more appropriate method to price the in-scope transaction. As the taxpayer may freely choose to apply the report on Amount B guidance, it is confusing as to why the guidance has provided an exception to the TNMM method for internal CUPs. In these cases, the existing OECD Guidelines should apply.

Taxpayers should consider assessing the impact on their current margins by applying a three-step process for in-scope transactions to timely locate and address potential risks in jurisdictions with baseline marketing and distribution activities.