On February 19, 2024, the Report on Pillar 1 – Amount B, introducing a simplified and streamlined approach for pricing basic marketing and distribution activities in an intra-group context, has been published as a result of the works of the OECD/G20 Inclusive Framework on BEPS.
The Report will be incorporated into the OECD Transfer Pricing Guidelines as attachment to Chapter IV (“Administrative approaches to avoiding and resolving transfer pricing disputes”). It will provide to jurisdictions the opportunity (on optional or mandatory basis) to introduce the Amount B as of January 2025.
Transactions in scope
The simplified and streamlined approach introduced by Amount B applies to the following transactions:
- 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 good to unrelated parties.
The Report identifies, among the transactions covered by the simplified and streamlined approach, those that have relevant characteristics that mean it can be reliably priced using a one-sided transfer pricing method, with the distributor, sales agent or commissionaire agent being the tested party.
From a quantitative perspective, it is provided that the tested party in the qualifying transaction must not incur annual operating expenses lower than 3% or greater than an upper bound of between 20% and 30% of the tested party’s annual net revenues.
In any case, even if a qualifying transaction meets the above mentioned criteria, it will be nevertheless out of scope if (i) it involves the distribution of non-tangible goods, services or the marketing, trading or distribution of commodities, or (ii) the tested party carries out non-distribution activities in addition to the qualifying transaction, unless the qualifying transaction can be adequately evaluated on a separate basis and can be reliably priced separately from the non-distribution activities.
Application of the most appropriate method to in-scope transactions
Based on the economically relevant characteristics of in-scope transactions and the information available on comparable uncontrolled transactions, the TNMM is typically chosen as the most appropriate method under the simplified and streamlined approach.
However, the Report recognizes that there may be instances where the application of the CUP method using internal comparables could be potentially more appropriate to apply the price in-scope transactions and such method can be exceptionally used.
Documentation
In general, transfer pricing documentation ensures that tax administrations have access to the necessary information to conduct risk assessment processes and/or to audit the taxpayer’s transfer pricing practices. In the case of the simplified and streamlined approach, documentation is important to ensure that tax administrations have sufficient and reliable information to assess whether taxpayers’ qualifying transactions meet the scoping criteria and taxpayers have properly applied the simplified and streamlined approach to in-scope transactions.
The Report points to some items of information that may already be included in the local file and can be relevant and useful to tax administrations in assessing whether the taxpayer’s qualifying transactions meet the scoping criteria, and, if the taxpayer applied the pricing methodology, whether it did so properly:
- an explanation of the delineation of the in-scope qualifying transaction, including the functional analysis of the taxpayer and the relevant associated enterprises and the context in which such transactions take place;
- the contract or the agreement concluded governing the qualifying transaction and supporting the explanation on the delineation of the in-scope qualifying transaction described in point i.;
- calculations showing the determination of the relevant revenue, costs and assets allocated or attributed to the in-scope transaction;
- information and allocation schedules showing how the financial data used in assessing the applicability of the simplified and streamlined approach and applying the transfer pricing method ties to the annual financial statements.
When the taxpayer is seeking to apply the simplified and streamlined approach for the first time, it should include in its documentation relevant to the application of the approach a consent to apply it for a minimum of three years, unless transactions are no longer in scope during that period, or there is a significant change in the taxpayer’s business, and notify that circumstance to the tax authorities of the jurisdictions involved in the qualifying transaction.
The impact of the Report on bilateral or multilateral APAs and MAPs
The final section of the Report focuses on bilateral or multilateral APAs and to MAPs obtained prior to the implementation of the simplified and streamlined approach. The Report provides in this respect that the terms and conditions of such agreements would continue to be valid in relation to the covered qualifying transactions.
DISCLAIMER: This article merely provides general information and does not constitute legal advice of any kind from Macchi di Cellere Gangemi which assumes no liability whatsoever for the content and correctness of the newsletter. The author or your contact in the firm will be happy to answer any questions you may have.