OECD Pillar One “Amount B” – key update

The OECD has just released its guidance on Amount B of Pillar One, now rebadged as the Simplified and Streamlined Approach for baseline marketing and distribution functions (‘the SSA’). 

These will be included in the Transfer Pricing Guidelines this year and will be available for jurisdictions to apply from 1 January 2025.

Why is this important?

The SSA will mean material changes in the way the pricing for distribution functions is set and supported going forward. This could impact the level of return that is accepted by some tax authorities as being at arm’s length, and so could either change a group’s effective tax rate, place them at risk of double taxation, or both. In terms of compliance requirements, the SSA will require a different form of economic analysis with the replacement of benchmarking by a more formulaic approach in certain jurisdictions.

Amount B / Simplified and streamlined approach – key points in brief

While there is much that is familiar from the OECD’s consultation phase, the SSA rules as released are very detailed. Key initial points appear to be as follows:

1. The aim of the SSA is to provide an approximate arm’s length outcome for in-scope baseline marketing and distribution arrangements.
2. These baseline distribution arrangements are essentially those where product is acquired from related parties and sold on to third parties who are not end consumers, and for whom a one-sided method is appropriate. Retail sales, along with services, sale of digital products and the sale of commodities are excluded.
3. There is no size threshold included in the SSA rules. The rules will be included in the OECD Guidelines, and so will apply where they do (with start dates as determined by each jurisdiction).
4. That said, jurisdictions may choose to apply the SSA rules. If so, a jurisdiction can either offer the SSA as a safe harbour which taxpayers may elect to apply, or require use of the SSA in a prescriptive manner.
5. The SSA will not be available for use as support in other territories (even counterparty territories), or for use in the pricing of any other transactions, for which the rest of the OECD’s Transfer Pricing Guidelines will still apply.
6. For in-scope entities, their return will first be tested against a matrix of return on sales results (based on industry and asset intensity), which is then subject to a cross-check based on operating expenses.
7. Documentation will still be required, with the expectation that local file requirements as they stand will cover most of the information required with the additional of an explanation of how the SSA has been applied.

Businesses addressing these rules will want to consider:

1. Which of their operating territories plans to adopt the SSA rules and, if so, whether they will be offered as a safe harbour or prescriptive.
2. The characterisation of their distribution activities – whether they fall within the SSA rule and, if so, which industry category would be best-fit when using the pricing matrix.
3. Whether both their relevant financial data and reporting processes are robust.
4. Modelling the likely impact of the SSA to understand its potential effect on the group’s effective tax rate and whether adopting the SSA would be recommended where it is available.
5. How best to make their transfer pricing documentation ‘SSA-ready’.

RSM will continue to publish information and thought leadership as it develops. Please feel free to get in touch with Liam Delahunty or your local RSM adviser.