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ARTICLE
5 March 2024


OECD RELEASES TRANSFER PRICING GUIDANCE ON A SIMPLIFIED AND STREAMLINED APPROACH
(AMOUNT B OF PILLAR ONE)

OH
Osler, Hoskin & Harcourt LLP
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On February 19, 2024, the OECD/G20 Inclusive Framework on BEPS (Inclusive
Framework) released a report on Amount B (Amount B Report) that provides
guidance on the simplified...
Canada Tax
Patrick Marley,Amanda Heale,Oleg Chayka
+1 Authors
Your Author LinkedIn Connections
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On February 19, 2024, the OECD/G20 Inclusive Framework on BEPS (Inclusive
Framework) released a report on Amount B (Amount B Report) that provides
guidance on the simplified and streamlined approach (SSA) for pricing certain
routine, wholesale marketing and distribution transactions (including sales
agency and commissionaire transactions). The guidance is incorporated into the
OECD's Transfer Pricing Guidelines for Multinational Enterprises and Tax
Administrations (the OECD Transfer Pricing Guidelines) as an Annex to Chapter
IV.

Pillar One is part of the OECD's two-pillar initiative and involves two key
elements:

 * Amount A – reallocation of taxing rights to market jurisdictions where
   customers are located, allowing these jurisdictions to tax a share of
   residual profits of in-scope multinational enterprises (MNEs) under a
   multilateral convention on Amount A (MLC on Amount A)
 * Amount B – simplification of the transfer pricing of certain baseline
   wholesale marketing and distribution activities by providing fixed returns
   derived from a pricing matrix that is updated from time to time

On July 11, 2023, the Inclusive Framework released a statement (Outcome
Statement) indicating its intention for the MLC on Amount A to be signed by the
end of 2023. When it became evident that this deadline would not be met, the
OECD released a brief statement on December 18, 2023, delaying the anticipated
finalization of the MLC on Amount A to March 2024. There is a significant risk
that the MLC on Amount A will not be finalized by that deadline, if at all. In
particular, the United States has an effective veto over its ratification, and
there has been significant political opposition to the proposals in that
country.

Unlike Amount A, which requires a separate multilateral convention, Amount B can
be implemented through amendments to the OECD transfer pricing guidelines. The
Outcome Statement indicated the Inclusive Framework's intention to finalize a
report on Amount B and to incorporate it into the OECD Transfer Pricing
Guidelines by December 31, 2023. The released Amount B Report missed that
deadline but fulfilled the objective.


IMPACT OF THE AMOUNT B REPORT

The SSA is proposed to be optional for jurisdictions; countries can choose to
apply it beginning January 1, 2025. Jurisdictions that decide to adopt the SSA
may do so on either a mandatory or an elective basis for its taxpayers. That is,
a country may implement the SSA as either a simplified transfer pricing method
applicable to qualifying transactions or as an effective "safe harbour" for
taxpayers that choose to employ the SSA to those transactions. It is possible
that further changes could be made to the Amount B guidance. In particular, the
U.S. Treasury continues to advocate for the SSA to be mandatory across all
jurisdictions.

In its Transfer Pricing Consultation Paper released on June 6, 2023, the
Canadian Department of Finance stated that "Canada remains an active participant
in [work on Pillar One] and will consider the implementation of Amount B once
the proposals are finalised." The draft legislative proposals included in the
Transfer Pricing Consultation Paper (which did not address simplified methods)
have not been introduced in a bill, and Finance has not yet indicated whether
Canada will adopt Amount B on either an elective or mandatory basis.


QUALIFYING TRANSACTIONS

The following two types of transactions may be qualifying controlled
transactions if they meet the scoping criteria:

 * marketing and distribution trading transactions where a wholesale distributor
   purchases goods from related enterprise(s) and on-sells them on a wholesale
   basis to unrelated persons
 * sales agency and commissionaire transactions where a sales agent or
   commissionaire is involved in a wholesale distribution of goods by one or
   more related enterprises to unrelated persons

To be eligible for the SSA, a qualifying transaction must also meet additional
scoping criteria:

 * The qualifying transaction must exhibit economically relevant characteristics
   so that it can be reliably priced using a one-sided transfer pricing method
   where the distributor, sales agent or commissionaire is the tested party.
 * The tested party 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.
 * The tested party must not carry 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.

Consistent with the approach taken in the OECD Transfer Pricing Guidelines to
all controlled transactions, the functions performed, assets used and risks
assumed by the parties are to be analyzed to determine whether a transaction is
in scope, including, notably, whether the marketing and distribution function is
sufficiently routine as to be reliably priced using a one-sided method.

Only wholesale marketing and distribution transactions may qualify for the SSA.
If a distributor engages in both wholesale and retail distribution, it is deemed
to carry out only wholesale distribution provided that the retail activities are
de minimis, meaning that the three-year weighted average net retail revenues do
not exceed 20% of the distributor's three-year weighted total average net
revenues.

The distribution of intangible goods and services are specifically carved out
from qualifying transactions, as are transactions involving commodities.

While the scope of Amount A is limited to large multinational enterprises with
revenues in excess of €20 billion, the Amount B Report does not include any
similar limitation. This absence is consistent with the fact that Amount B is a
separate transfer pricing initiative that has no direct linkage to, and is not
dependent on, Amount A. Amount B can be fully implemented regardless of whether
or not an MLC on Amount A ever comes into force.


METHOD

Under the SSA, the guidance in the Amount B Report provides that the
transactional net margin method (TNMM), with return on sales as the net profit
indicator, is generally the most appropriate transfer pricing method. The
comparable uncontrolled price (CUP) method can also be used in certain
situations where it "can be reliably applied and the necessary information is
readily available to tax administrations and taxpayers."


PRICING MATRIX AND THREE-STEP PROCESS

The Amount B Report sets out a pricing matrix that is at the heart of the SSA.
The matrix provides pricing outcomes for qualifying transactions, expressed as
returns on sales ranging from 1.5% to 5.5%, depending on the "intensity" of
certain operating factors and industry groupings.

The Amount B pricing outcomes were determined by analyzing a global dataset of
financial information of selected (benchmarked) distributors that conduct
relevant baseline marketing and distribution activities. The Amount B Report
includes an appendix that describes the benchmarking search criteria. The
returns featured in the pricing matrix are meant to approximate arm's length
outcomes for qualifying distributors and, accordingly, to simplify and
streamline their compliance with the arm's length principle.

The Amount B Report sets out a three-step process to determine the appropriate
rate of return for a tested party involved in a qualifying transaction for the
relevant year:

 * Step 1 – Out of three industry groupings provided, identify the industry
   grouping(s) of the tested party. (If multiple groupings apply, determine the
   proportion of sales for each grouping, and use a weighted average if multiple
   groupings have 20% or more of sales.)
 * Step 2 – Out of five "factor intensity" scenarios provided, determine which
   of the scenarios of the tested party applies based on the party's relative
   net operating asset intensity and operating expense intensity.
 * Step 3 – Identify the range of return on sales provided in the matrix
   applicable to the intersection of the industry grouping(s) and the factor
   intensity classification of the tested party.

Placement of the qualifying transaction on the pricing matrix determines whether
it falls within the arm's length range of plus or minus 0.5% of the applicable
return on sales percentage.

The Amount B Report provides for adjustments to the return on sales determined
by the pricing matrix in two circumstances. The first is an "operating expense
cross-check," wherein an adjusted return on sales is required if the return on
operating expenses of the tested party falls outside the pre-defined
"cap-and-collar" range of operating expenses. The second is a "data availability
mechanism," applicable when a tested party is located in a "qualifying
jurisdiction" for which no (or insufficient) data are available in the global
dataset. In that case, an adjustment to the return on sales is made, in part by
reference to the sovereign credit rating of the qualifying jurisdiction. The
criteria for "qualifying jurisdictions" are to be set out in a subsequent update
to the Amount B guidance.

The return on sales ranges, operating expense cap-and-collar range and
"qualifying jurisdictions" will be updated every five years, unless (based on an
annual review of the financial data in the global dataset) there is a
significant change in market conditions that merits an earlier update. Other
data points in the SSA (including those composing the data availability
mechanism) will be reviewed and, where necessary, updated annually.


COMPLIANCE AND DOCUMENTATION

A taxpayer contemplating applying the SSA for the first time must include in its
local file (or other relevant documentation) a consent to apply the SSA for a
minimum of three years, subject to some exceptions relating to the three-year
requirement.

Taxpayers must have sufficient reliable information to enable the tax
authorities to audit and assess their eligibility for and application of the
SSA, including an explanation of the delineation of the qualifying transaction,
relevant contracts, calculations supporting the determination of revenue, costs
and assets allocated or attributed to the qualifying transaction, and
information and allocation schedules demonstrating how the financial data used
for the SSA tie to the annual financial statements.


DISPUTE PREVENTION AND RESOLUTION

The fact that jurisdictions may opt out of the SSA gives rise to uncertainties
and an inherent risk of double taxation as the outcome under the SSA for a
participating jurisdiction is not binding on a jurisdiction that has opted out.
The Amount B Report therefore also includes guidance on how potential disputes
should be managed and resolved, including through the mutual agreement procedure
(MAP) under the relevant double tax treaties, and directs Working Party 1 to
develop appropriate conforming text for the Commentary to the OECD Model Tax
Convention.

The potential for double taxation and disputes is intended to be reduced for
certain "low-capacity jurisdictions" that adopt the SSA. The introduction to the
Amount B Report notes that for such jurisdictions, all members of the Inclusive
Framework are expected to respect the resulting transfer pricing and relieve any
double taxation even if they have not adopted the SSA themselves (subject to
"domestic legislations and administrative practices"). No specific guidance or
list of low-capacity jurisdictions is included in the Amount B Report; further
updates are to be released later this year.

The Inclusive Framework will also consider additional measures to make sure that
the outcomes determined under the SSA are respected and double taxation is
relieved. The Amount B Report clarifies that any bilateral and multilateral
advance pricing arrangement (APA), MAP or other agreement reached before the
implementation of the SSA is valid with respect to qualifying transactions, even
in jurisdictions where the SSA will be mandatory.


CONCLUSION

Released shortly after the missed deadline for finalizing guidance on Amount B,
the Amount B Report leaves certain work (including the criteria for and lists of
low-capacity jurisdictions and qualifying jurisdictions) incomplete, leading
India in particular to make certain reservations.

Multinational enterprises with operations in Canada are likely to welcome the
introduction of streamlined and simplified transfer pricing methodologies in
general and Canada's adoption of the SSA, assuming the streamlined and
simplified options are optional.

However, some caution is warranted. The Amount B Report limits the SSA to
circumstances where a comparability analysis supports the use of a one-sided
transfer pricing method. In practice, there is a risk that this intended
simplification exercise will instead shift the emphasis of audit and enforcement
activity (and the scope for debate and dispute) away from benchmarking studies
and towards the functional analysis required to determine whether the marketing
and distribution activities meet the criteria for qualifying transactions.
Canada and the other members of the Inclusive Framework should be encouraged to
continue all efforts to adopt streamlined and simplified approaches to transfer
pricing and to seek to resolve more transfer pricing disputes in a timely and
efficient manner.


FURTHER READING

For further details on the OECD's two-pillar approach, progress with finalising
Amount A and Amount B of Pillar One, Canada's commitment to Pillar One and
recent transfer pricing developments in Canada, please see the Osler Updates on

 * October 14, 2020 (blueprint reports on international tax Reform – Pillar One
   and Pillar Two)
 * December 14, 2020 (Osler submission on the OECD Pillar One and Pillar Two
   blueprints)
 * October 12, 2021 (statement on the Two-Pillar Solution)
 * December 21, 2021 (draft DST legislation)
 * March 28, 2023 (Budget 2023 update on Pillar One and Pillar Two)
 * June 12, 2023 (release of consultation paper proposing amendments to Canada's
   transfer pricing rules)
 * July 14, 2023 (subject-to-tax-rule and Canada's position on DST moratorium
   extension)
 * July 31, 2023 (Osler submission on transfer pricing consultation paper)
 * August 10, 2023 (draft Global Minimum Tax Act (Canada) and revised DST
   legislation)
 * November 21, 2023 (update on the Canada's plans to introduce a digital
   services tax in Fall Economic Statement 2023)
 * December 1, 2023 (Osler legal outlook on how transfer pricing proposals
   infuse Canada's tax laws with OECD concepts)
 * December 4, 2023 (Bill C-59, which includes a revised version of the DST
   legislation and related regulations)
 * December 21, 2023 (OECD releases third administrative guidance on Pillar Two
   and confirms delay of the Pillar One timeline)

The content of this article is intended to provide a general guide to the
subject matter. Specialist advice should be sought about your specific
circumstances.

Authors
Patrick Marley
Amanda Heale
Peter Macdonald
Oleg Chayka
Your Author LinkedIn Connections
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