The Organisation for Economic Co-operation and Development (OECD) released a new report on Feb. 19 with guidance on Amount B under the Pillar 1 Inclusive Framework on Base Erosion and Profit Shifting that makes the simplified transfer pricing rules elective.
Pillar 1 would allow countries to tax a share of profits from digital goods and services consumed in a jurisdiction, even when the taxpayer has no physical presence there, and Amount B is meant to provide a simplified and streamlined approach for the transfer pricing of certain baseline wholesale marketing and distribution activities.
The report has been incorporated into the OECD Transfer Pricing Guidelines (TPG), and the OECD has committed to developing additional guidance by March 31, 2024, with any updates also being incorporated into the TPG. The OECD website will list the jurisdictions that opting into Amount B.
Although the full impact of the report will not be known immediately, its ‘optional’ approach to price baseline wholesale marketing and distribution activities may hinder it from achieving the certainty sought by companies or countries. Jurisdictions can choose to apply: 1) mandatory application of the streamlined approach, 2) taxpayer election of the streamlined approach, or 3) no application of the streamlined approach. The choice by one jurisdiction of the simplified and streamlined method is not binding on the counterparty jurisdiction. All of this flexibility may undermine the simplified and streamlined process.
In-scope transactions
The primary focus of Amount B is on the wholesale distribution of goods, including by commissionaires and sales agents; de minimis retail sales are allowed. These distribution arrangements need to be “baseline” to fall within the scope of Amount B. The report identifies multiple carve-outs from qualifying transactions, including the assumption of economically significant risks, ownership of valuable intangibles, and sales of commodities and digital goods and services. These exceptions may limit the applicability of the approach.
Determining the return
Consistent with TPG concepts, the Transactional Net Margin Method (TNMM) is generally viewed as the most appropriate method for in-scope transactions. In-scope transactions are generally priced by reference to a pricing matrix that provides a grid of arm’s-length returns expressed as returns on sales (ROS). The applicable arm’s-length return will depend on the distributor’s specific features such as the level of operating assets, operating expense and the industry.
The report also provides guidance on documentation, transition issues and dispute resolution.
Grant Thornton Insight:
Although the ‘optional’ approach employed by the report may prevent it from immediately achieving the certainty sought by companies or countries, the streamlining and simplification goals of Amount B are worthy of the efforts and compromise needed to achieve a global consensus.
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