During the past few years, the global tax landscape has significantly evolved due to the OECD's and EU’s initiatives – measures like the OECD’s Pillar Two, Country-by-Country Reporting and EU’s requirements on public disclosures of such reporting (Public CbCR), continuous updates to the OECD Transfer pricing guidelines. These measures demand that MNEs align their operations with their tax planning strategies accordingly. The OECD’s recent report on Pillar One Amount B marks another significant development in the global tax world. In this article we discuss key aspects of this report and how companies should prepare for these new transfer pricing guidelines which will impact a lot of companies engaged in distribution activities.  

This article was written by Vera Zhuravleva and Shaun Britz. Vera and Shaun are part of RSM International Tax Services with a strong focus on transfer pricing.

Published in February this year, the Organisation for Economic Co-operation and Development (“OECD”)’s Pillar One Amount B report brings material changes to the way intercompany distribution activities will be set and supported going forward. Through the introduction of the Simplified and Streamlined Approach (“SSA”), the OECD has provided an industry specific pricing matrix which can be used for pricing baseline distribution and marketing activities. Importantly, the SSA does not include a materiality threshold, which means that it could apply to small international companies as well. The SSA will be applicable for years starting on or after 1 January 2025.

The key aspects of the SSA are as follow:

  • The intercompany arrangements which are potentially in scope include baseline distribution, sales agency and commissionaire transactions. Note that some distribution and sales activities are excluded from scope, thus requiring taxpayers to do a proper assessment of whether they are in scope or not and to segregate the financial results of the activities.
  • Where a combination of in scope and out of scope activities are performed, the activities are required to be segregated (if possible). 
  • For a qualifying transaction to be in scope of the SSA, certain financial checks need to be performed, including verifying the tested party annual operating expenses to annual net revenues ratio. 
  • If the SSA is applicable to an intercompany transaction, a formulaic approach is used instead of a benchmarking study, i.e. the return of in-scope entities will be tested against a pricing matrix provided by the OECD. The pricing matrix provides a narrow deviation range of only ±0.5% from the target margin.
  • Transfer Pricing documentation will still be required and would technically need to include the application of the SSA for qualifying transactions and a “standard” (non-SSA) approach for other transactions. 
  • The adoption of the SSA by qualifying jurisdictions is voluntary and the SSA can be applied either as a safe harbour which taxpayers may elect to apply, or in a prescriptive manner. Counterparty jurisdictions not adopting the SSA are not required to abide by the results of the SSA. 

It is important to note that the OECD is yet to release final definitions for so-called “low-capacity jurisdictions” which might attract additional country risk adjustments in the calculation of the SSA. Although the initial timeline given by the OECD on this has passed, we expect this information to be released soon. 

Forward thinking

From a business perspective, the SSA should not be viewed as just another compliance obligation but can be used as a tool to optimize the transfer pricing framework and reporting within an international company. In addition, it may help companies to assess potential transfer pricing risks, as it provides a reference return for distribution activities that may be expected by local tax authorities.

International companies addressing the new guidelines may need to consider:  

  • Characterization of their distribution activities and segmentation of the activities between qualifying and non-qualifying, where needed. A robust functional analysis is critical, to be able to distinguish between qualifying and non-qualifying activities.   
  • Modelling the impact of the SSA to understand its potential effect and strategize how adopting the SSA can help optimize transfer pricing planning and compliance. With the SSA applying for years starting on or after 1 January 2025, now is the time to act.
  • Category(ies) which would be best-fit when using the pricing matrix. 
  • Considering the narrow deviation range, the relevant financial data, real-time monitoring and reporting processes should be in place to address the new requirements. 
  • Consider the adoption of the SSA in their operating jurisdictions to avoid double taxation and disputes.
  • Assess how best to support the application of the SSA from a transfer pricing documentation perspective.

Key take-aways

Although a welcome relief to the mounting compliance burden for international companies, it will be important for international companies to first assess whether the SSA is applicable and implement internal processes to ensure that the SSA is executed properly. Once that is in place, international companies can benefit from the framework provided by the SSA and use it as an effective tool to manage and control transfer pricing policies.

RSM is a thought leader in the field of International Tax and Transfer Pricing. We offer frequent insights through training and sharing of thought leadership that is based on a detailed knowledge of global tax reforms, regulatory obligations, and practical applications in working with multinational corporations. If you want to delve deeper into the complexities of international tax policy in a constantly evolving world, please reach out to one of our consultants.