OECD Publishes Final Guidelines on Amount B of Pillar One

As part of the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy agreed by the OECD/G20 Inclusive Framework on BEPS in October 2021, Amount B provides for a simplified and streamlined approach to the application of the arm’s length principle to in-country baseline marketing and distribution activities.

In this context, the OECD has published on February 19th, 2024, its final guidance on Amount B of Pillar One. This is a significant development, as it is expected to help reduce administrative burdens for tax administrations and taxpayers, particularly in low-capacity countries.

Transfer pricing disputes can be complex and time-consuming, and they can often arise in relation to marketing and distribution arrangements. These disputes can involve issues such as the delineation of the arrangement, the selection of the appropriate transfer pricing method, and the comparability of data.

The simplified and streamlined approach outlined in the Amount B guidance is designed to address these challenges by providing a clear and consistent methodology for determining the arm's length price for qualifying transactions. This approach is based on a global pricing matrix that considers the distributor's net operating asset intensity, operating expense intensity, and industry group.

Key features of the simplified and streamlined approach:

·?????? Applies to buy-sell marketing and distribution transactions and sales agency and commissionaire transactions.

·?????? Only applies to transactions where the distributor must not incur annual operating expenses lower than 3% or greater than an upper bound of between 20% and 30% of its annual net revenues.

·?????? Does not apply to transactions involving intangibles, services, or commodities.

·?????? Uses return on sales as the net profit indicator.

The OECD believes that the simplified and streamlined approach will be a valuable tool for tax administrations and taxpayers alike. It is expected to reduce the risk of disputes and make it easier for businesses to comply with their transfer pricing obligations.

It is important to note that the simplified and streamlined approach is optional. Jurisdictions are not required to adopt it, and taxpayers are not required to use it. However, it is likely to be attractive to many businesses, particularly those that operate in multiple jurisdictions or that do not have access to reliable comparability data.

However, a company will not have to use the simplified and streamlined approach to justify its position in a country that does not apply the Amount B. In addition, a list of countries applying the Amount B will be added to the OECD website.

Mazars’ comments:

If the idea of the Amount B of Pillar One is to provide a simplified approach to tax administrations and taxpayers located in low-capacity countries, this simplification is quite relative and raises some questions.

Indeed, if this simplified approach for distribution and marketing activities could replace distribution benchmarking studies for transactions under the scope and in countries applying Amount B, a transfer pricing documentation would still be required to indicate the Amount B process applied in particular a detailed analysis explaining the transaction covered, the selection of the points in the ROS matrix based on the computation of different financial ratios.

In addition, issues would be raised regarding Amount B in particular when a tested party of a transaction in located in a country applying this simplified approach and the other counterparty is located in a country which does not apply this approach. Regarding the level of risk, the MNEs would apply either Amount B or the transactional net margin method through a distribution benchmarking study. This situation creates a risk since the transaction is treated differently in the two countries. Consequently, it is likely that this situation will involve tax reassessment as part of tax audits and the double taxation would have to be eliminated through mutual agreement procedures.

A last question could be raised for new established companies since the computation of the financial ratios should be based on the 3 last financial statements.

Frederic BARAT

Partner, Attorney-at-Law

[email protected]

+33 (0)1 49 97 45 86

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Frédéric Lubczinski

Partner, Attorney-at-Law

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Coralie Crespin

Senior Manager, Attorney-at-Law

[email protected]

+33 (0) 1 49 97 62 63

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Stéphanie Gavrel

Senior Manager, Attorney-at-Law

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Christophe Neyroud

Senior Manager

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