Pillar I’s B amount – will the new proposed transfer pricing method carry out a ‘revolution’? What does it consist of? In which transactions can it be applied? In today’s article we will try to answer the above questions about the new OECD proposal.
The future of transfer pricing – the B Amount of Pillar I
Taxpayers realizing transactions with related parties are obliged to apply arm’s length prices. Often, the determination of the price involves considerable costs – whether in the purchase of a database containing the information needed to prepare a benchmark or in connection with the outsourcing of the analysis to an external company. On 19 February 2024, the OECD/G20 project published its report on the Pillar One B Amount. It provides information on a new transfer pricing solution that has the potential to significantly simplify the approach to applying the arm’s length principle to certain transactions, as well as to reduce the number of related disputes (which will indirectly translate into lower costs for taxpayers).
To which transactions is the B Amount directed?
The transactions eligible to benefit from the B Amount are:
- marketing and distribution sales-purchase transactions, whereby a distributor purchases goods from one or more related companies for wholesale distribution to unrelated parties,
- sales agency and commission agent transactions, in which a sales agent or commission agent contributes to the wholesale distribution of goods by one or more related companies to unrelated parties.
While it is important to note that for a transaction to be covered by the simplified and streamlined approach:
- it must exhibit economically significant characteristics that mean it can be reliably valued using a one-sided transfer pricing method (e.g. TNMM), with the distributor, sales agent or commission agent being the party under test,
- it must not incur annual operating expenses lower than 3% or higher than an upper limit between 20% and 30% of the tested party’s annual net revenues (weighted average of the three years preceding the year under review).
How to determine the market price?
The solution described in this article is based primarily on the determination of a fixed rate of return on investment for the taxpayer. In order to obtain this ratio, a pricing matrix should be used, which will indicate the market level of profitability depending on the type of industry and on the relevant intensity ratios (which depend on, for example, costs and operating assets). The report indicates in detail the methodology and the various steps to be followed to establish the market price.
What about local documentation?
According to the report, where the B Amount is applied, the documentation should provide the tax authorities with sufficient and reliable information to assess whether the taxpayers’ qualifying transactions meet the scope criteria and whether the taxpayers have properly applied the simplified and streamlined approach to the covered transactions.
Effective date
It should be noted that the findings of the OECD’s B Amount report are not binding on OECD countries. Each country will have three options:
- not to introduce the B Amount into the legal system;
- making the B Amount available to willing taxpayers (‘safe harbour’);
- making the use of the B Amount mandatory.
Countries interested in the B Amount, will have the option to apply it from January 2025.
Evaluation of the B Amount
The described solution may contribute to a simplified approach to routine marketing and distribution activities. On the other hand, it cannot be ignored that each country will be free to adopt this method on an optional basis. This may lead to a situation where country X, which does not introduce the B Amount into its legal system, will not recognise the transfer price calculated in accordance with this methodology in counrty Y, which has made the use of the B Amount mandatory for transactions eligible for its application. Such a situation may prove problematic.
Work is currently still underway to finalise the report and the B Amount, but it can be certain that this method will be introduced in a very similar form to that described in this article. For information about the B Amount of Pillar I, please do not hesitate to contact us. Advicero’s experts will be happy to provide details of the conditions for the application of the B Amount.
