The new simplified OECD approach to transfer pricing of business activities for Multinational groups.

Antonio Lanotte

Abstract.

On 19 February 2024, the OECD/G20 Inclusive Framework on BEPS (IF) published the announced report on Amount B of Pillar One. [1] Pillar One is the first of the two pillars (Pillar One, Pillar Two) to which the IF-countries have made a political commitment in 2021 to address the tax challenges arising from the digitalisation of the economy. Pillar One concerns the international political agreement on a formulary based profit tax base redistribution to market jurisdictions, the so-called Amount A, for the approximately one hundred largest multinationals worldwide. On 11 October 2023, the IF published the Multilateral Convention to Implement Amount A of Pillar One (MLC), a draft tax treaty to implement Amount A that is now awaiting to become a reality at some point in future.

Pillar Two concerns the global 15% minimum tax system. (TNI, Global Minimum Taxation (Pillar 2) with practical examples) [2]

On the other hand, the “Pillar One - Amount B” Report introduces a simplified approach to determining the arm's length remuneration of transactions involving so-called “baseline” marketing and distribution activities. This simplified approach aims to establish a fixed remuneration for routine marketing and distribution functions, which are often challenging to accurately price under traditional transfer pricing methods due to their intangible nature and the difficulty in finding comparable transactions. By providing a predetermined baseline remuneration, it seeks to reduce transfer pricing disputes and promote tax certainty for multinational enterprises (MNEs) and tax authorities alike.

Introduction.

Following the public consultations held in December 2022 and July 2023, the OECD/G20 Inclusive Framework published the “Pillar One - Amount B” Report on February 19, 2024. This report introduces a simplified approach, known as “Amount B,” for determining the arm's length remuneration of transactions involving baseline marketing and distribution activities. The publication of this report marks a significant step in the ongoing efforts to address the tax challenges posed by the digitalization of the economy and to ensure a fair allocation of taxing rights among jurisdictions. “Amount B” provides a structured framework for determining the remuneration of routine marketing and distribution functions, aiming to enhance tax certainty for multinational enterprises (MNEs) and tax authorities.

The divergences concerning distributor remuneration have been a significant factor contributing to double taxation situations, especially in the context of international transactions involving intangible assets and services. Traditional benchmark analyses used to determine arm's length remuneration for these transactions often involve subjective judgments and rely on finding comparable transactions, which can be challenging and lead to disputes between tax authorities and multinational enterprises (MNEs). The “Pillar One - Amount B” Report seeks to address these challenges by introducing a simplified approach that replaces traditional benchmark analyses with predefined remunerations for baseline marketing and distribution activities. By providing predetermined remuneration rates, the report aims to offer more certainty to operators, reducing the likelihood of disputes and double taxation. The Report is included as an annex to Chapter IV of the OECD Guidelines and is therefore part of them.

The Report.

The Report gives Jurisdictions the option to introduce Amount B as of January 2025, in this diverging from what is typically provided for the remaining clarifications in the OECD Guidelines, which are to be considered interpretations that apply to all Jurisdictions. A Jurisdiction that intends to adopt Amount B will also be able to choose whether to make this approach optional or binding on taxpayers. By providing this optionality, the report acknowledges the diversity of tax systems and preferences among OECD/G20 member countries and recognizes the need for flexibility in implementing international tax reforms. It also reflects a pragmatic approach to consensus-building among jurisdictions, allowing for gradual adoption and experimentation with new approaches to address the tax challenges of the digital economy. [3]

“Amount B” primarily targets limited risk distributors, agents, and commission agents whose activities are considered basic and do not involve unique or valuable contributions. These activities are typically routine in nature and involve standard marketing and distribution functions. Additionally, the report specifies that if retail distribution activities are also conducted by these entities, they must be of a residual nature, accounting for no more than 20 percent of revenues. This indicates that the focus of “Amount B” is on transactions involving wholesale or distribution activities rather than retail sales. It's important to note that “Amount B” does not apply to transactions involving the marketing of intangible assets, services, or commodities. This limitation suggests that the simplified approach provided by “Amount B” is specifically tailored to transactions involving tangible goods and basic marketing and distribution functions. To be in-scope, transactions must be able to be valued by applying a one-sided transfer pricing method (e.g., TNMM). In addition to this, the Report outlines a number of qualitative and quantitative criteria. Qualitatively, assessment of transaction characteristics is required to identify any non-baseline, i.e., high value-added, contributions that cannot be separated from the distributional transaction. It will then be diriment to accurately delineate the transaction to reduce the risk of challenge by tax authorities. The quantitative criterion, on the other hand, is expressed as the ratio of operating expenses to net revenues realized, in the case of a buy-sell entity, or brokered, in the case of an agent/commissioner, which must be between a minimum threshold of 3 percent and a maximum threshold of between 20 percent and 30 percent (the definition of which is left to individual jurisdictions). Entities with an indicator outside this range are excluded from the application of the simplified approach. These criteria provide a structured framework for determining the eligibility of transactions for the simplified approach under “Amount B.” By incorporating both qualitative and quantitative assessments, the approach aims to ensure that only transactions involving baseline marketing and distribution activities are subject to the simplified transfer pricing method, while more complex or high-value transactions are subject to traditional transfer pricing analysis. After identifying the criteria for defining “qualified” transactions, the Report proposes a matrix that reports arm's length operating margins. A global set of independent comparables is proposed, as well as the use of various parameters and profit indicators to place the tested party within the matrix. The ranges are divided by industry sector and in each group based on two intensity indicators: operating assets/turnover ratio and operating expenses/turnover. Operating expense cross-check is also provided in order to reduce any abnormal results.

Finally, the Report contains a section on fiscal certainty issues. First, there is an escape clause whereby bilateral APAs and MAPs concluded before the introduction of Amount B remain in force. In addition, it is provided that the outcome determined under the simplified approach by a jurisdiction that has chosen to adopt Amount B is not binding on the counterpart jurisdiction. By incorporating these fiscal certainty measures, the “Amount B” Report seeks to provide a balance between promoting tax certainty for taxpayers and ensuring the autonomy of jurisdictions in enforcing their tax laws and resolving disputes. These provisions aim to mitigate potential uncertainties and risks associated with the transition to the new transfer pricing framework while fostering international cooperation and consensus-building in the field of taxation.

Conclusions.

In conclusion, “Amount B” is not subject to any size threshold, multinational groups will need to assess whether their transactions fall within the scope of the simplified approach and evaluate the potential impact on such transactions. This assessment will be crucial for multinational enterprises (MNEs) to ensure compliance with transfer pricing regulations and to manage tax risks effectively. As jurisdictions begin to implement “Amount B,” it will be important for MNEs to monitor these developments closely, as the adoption of the simplified approach could have significant effects on group-wide taxation purposes. The implementation of “Amount B” in different jurisdictions may result in variations in tax liabilities and compliance obligations for MNEs operating across borders. Moreover, the introduction of “Amount B” may also have implications for other tax-related issues, such as the allocation of profits to permanent establishments (PEs), particularly in relation to the remuneration of local agents or commissioners. Since “Amount B” focuses on baseline marketing and distribution activities, it may impact the determination of profits attributable to PEs engaged in such activities. Therefore, MNEs should consider the potential impacts of “Amount B” on their overall tax planning strategies, transfer pricing policies, and allocation of profits among different entities within the group. Close attention should be paid to how the implementation of “Amount B” by various jurisdictions may affect the group's tax position and compliance requirements. This proactive approach will help MNEs adapt to the changing international tax landscape and mitigate any adverse effects on their business operations and financial performance.

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