OECD’s final Amount B report – game changer or complexify simplicity?

On 19 February 2024, the Inclusive Framework on BEPS published its final report on Amount B of pillar one both in English and French, which provides a simplified and streamlined approach to the application of the arm's length principle to baseline marketing and distribution activities. This blog provides a summary of transactions in scope, the underlying transfer pricing method, the timing, and Deloitte Switzerland’s view.

Background

Baseline marketing and distribution activities are likely the most frequent fact pattern that multinational enterprises ("MNEs") encounter in the jurisdictions in which they operate. At the same time, however, reports from some low-capacity jurisdictions estimate that transfer pricing disputes relating to such activities account for between 30% and 70% of their total transfer pricing disputes. As part of their global two-pillar project, the OECD/G20 intend to simplify the existing transfer pricing rules for such activities by introducing a "simplified and streamlined approach". This project is known as "Pillar One, Amount B". On 19 February 2024, the Inclusive Framework on BEPS published its long-awaited final report both in English and French.

Who and What? – Transactions in Scope (Chapter 3)

Only selected controlled transactions are eligible for the simplified and streamlined approach. The scope is relatively narrow:

• Buy-sell marketing and distribution transactions where the distributor purchases goods from one or more associated enterprises for wholesale distribution 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.

If the controlled transaction involves the distribution of intangible goods or the marketing, trading, or distribution of commodities, it does not qualify for the simplified approach. In addition, if the tested party also carries out non-distribution activities in addition to the qualifying transaction, it will not qualify for the simplified approach either.

How? – Transfer Pricing Methods and Simplified Approach (Chapter 4/5)

As a starting point, the report highlights that there may be instances, although rather rare, where the application of the comparable uncontrolled price method using internal comparables ("internal CUP") could potentially be more appropriate for pricing in-scope transactions. Otherwise, the report considers the transactional net margin method ("TNMM") to be the most appropriate method for the simplified and streamlined approach.

The simplified approach based on TNMM shall be applied based on matrix segments with the two dimensions industry grouping (vertical column) and factor intensity (horizontal column), consisting of net operating assets (“OAS”) and operating expense intensity (“OES”). The industry groups are defined in chapter 2 (e.g., MNEs distributing medical machinery falls in group 3).


The pricing matrix will produce a range equal to the return on sales percentage plus or minus 0.5%. The matrix has 15 different target rates of return with a total range of 1.5% to 5.5%. Moody’s BvD Orbis database was used for the initial research. According to the report, taxpayers will apply and test the actual outcome of in-scope transactions on an ex-post basis (i.e., the arm's length outcome-testing approach). Such testing is typically done as part of the year-end tax return process.

What Else? – Documentation (Chapter 6)

Moreover, the report sets out the documentation requirements for taxpayers seeking to demonstrate their eligibility for the simplified and streamlined approach.

When? – Timing & Next Steps

The content of the report will be incorporated as an annex to Chapter IV into the 2025 update of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Importantly, the jurisdictions do not need to adopt the simplified and streamlined approach as it is elective. If a jurisdiction adopts it, it has two options:

• Option 1: binding to all taxpayers in scope;
• Option 2: not binding, but an elective safe harbour for taxpayers.

If one jurisdiction adopts the new approach, it is not binding for jurisdictions which do not opt-in. The simplified and streamlined approach shall only be applied for fiscal years commencing on or after 1 January 2025. The list of jurisdictions that opt into Amount B will be made available on the OECD website.

Our View

Transfer pricing is a complex exercise that requires considerable resources, both for MNEs and for tax administrations. Given the prevalence of basic marketing and distribution activities in many MNEs, the OECD's original objective of a simplified approach was very welcome. However, the result is disappointing.

The simplified and streamlined approach is limited in scope and unfortunately complicated to apply. It is questionable whether 15 different target rates are really a simplification. Moreover, jurisdictions are not obliged to apply it. If they do apply it, it may be either mandatory for taxpayers or merely a safe harbour. If a jurisdiction adopts the new approach, it will not be binding on jurisdictions that do not opt in. It remains to be seen whether jurisdictions will adopt this approach at all. India has already expressed numerous reservations, which are listed in the report. It is not yet known whether Switzerland will adopt this approach. At the same time, however, the African Tax Administration Forum (ATAF) highly welcomes the report and calls it “a game changer for the African transfer pricing landscape”.

The simplified and streamlined approach will apply from calendar year 2025, if at all. MNEs falling within the scope of Amount B should review their existing transfer pricing model for distribution activities as soon as possible to be prepared if jurisdictions opt in.

If you would like to discuss this topic, please do reach out to our key contacts below.

Authors

• Thomas Hug - Partner, National Tax Office
  
• Martin Krivinskas - Partner, International Tax & Transfer Pricing
  
• Markus Reese - Partner, Transfer Pricing and M&A
  
• George Galumov - Partner, Transfer Pricing Financial Transactions Leader