On 19th February 2024, the Organization for Economic Cooperation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) released the report on Amount B of Pillar One. Amount B is based on the application of transfer pricing rules to determine a fixed return for the in-scope, in-country baseline marketing and distribution activities – including buy-sell, sales agent and commissionaire activities, which are common activities for Multinational Enterprises (“MNEs”) in jurisdictions where they do business. The MNEs are not required to meet monetary thresholds in order to fall within the scope of Amount B.
This framework is expected to reduce transfer pricing disputes, compliance costs, and enhance tax certainty for both tax administrations and taxpayers. It is particularly beneficial for low-capacity jurisdictions that face limited resources and data availability.
A simplified and streamlined approach:
The simplified and streamlined approach as per the report has been incorporated into the OECD Transfer Pricing Guidelines for MNEs and Tax Administrations 2022 as an Annex to Chapter IV – and conforming changes to the Commentary on Article 25 of the OECD Model Tax Convention relating to elimination of double taxation. Jurisdictions can elect to apply the approach but are not obliged to do so. For jurisdictions that choose not to apply the simplified and streamlined approach, the remainder of the OECD TPG will be guiding and the approach would not be decisive in dispute resolution procedures, even if the other involved jurisdiction applies the approach.
The approach provides a pricing framework whereby a three-step process determines a return on sales for in-scope distributors (based on (i) industry grouping, (ii) factor intensity classification, and (iii) the pricing matrix that corresponds to the intersection of (i) and (ii). The report describes the activities of a distributor that is within scope of Amount B (including certain non-distribution activities (e.g. manufacturing)), and of those excluded from the scope of Amount B (e.g. distribution of commodities or digital goods). It also introduces two implementation options for jurisdictions adopting the approach for fiscal years starting on or after 1 January 2025: where a jurisdiction may (i) allow, or (ii) require the tested party in the jurisdiction to apply the simplified and streamlined approach.
Other considerations and next steps:
The report provides guidance on:
(i) documentation (to include additional information in the TP local file as to how application of the simplified and streamlined approach ties to annual financial statements),
(ii) TP method (TNMM or internal CUP where available),
(iii) transitional issues, and
(iv) tax-certainty considerations (where disputes arises between businesses and tax authorities in relation to application of Amount B, existing tax dispute prevention and resolution mechanisms will apply, including APAs and MAPs)
Further work on the interdependence of Amount B and Amount A under Pillar One will be undertaken prior to the signing and entry into force of the Multilateral Convention.
Key takeaways:
The aim of the report on Amount B is to simplify administrative processes and increase tax certainty for taxpayers – although it is unclear whether the new guidance will meet these aims.
The application of Amount B is optional and jurisdictions may choose whether to apply the simplified and streamlined approach for in-scope transactions of tested parties in their jurisdictions. Therefore, situations may arise where taxpayers are required to apply the simplified and streamlined approach in some jurisdictions and the current arm’s length principle in others, increasing the administrative burden for taxpayers.
It is unclear how the adoption of Amount B in the OECD Guidelines provides increased tax certainty for taxpayers. On the current state of implementation, it may lead to decreased tax certainty, as disputes may arise if a jurisdiction has adopted the simplified and streamlined approach while the counterparty jurisdiction has not. Further, the outcome is non-binding on counterparty jurisdictions that don’t discourage jurisdictions to disagree on the local margins achieved.
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 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 assess the impact on their current margins by applying the three-step process for in-scope transactions to locate and address potential risks in jurisdictions with baseline marketing and distribution activities, in a timely manner.
For further information, please contact:
Christine Schwarzl, Taxise Asia
Christine.Schwarzl@TaxiseAsia.com
