Wednesday, 12 March 2025

OECD Pillar One – Simplified and Streamlined approach

On 19 February 2025, the OECD released the report on Amount B of Pillar One, providing a Simplified and Streamlined (S&S) approach to determine an arm’s length remuneration for baseline marketing and distribution activities. This standardized methodology eliminates the need for a benchmark and establishes a fixed return on sales ranging from 1.5% to 5.5%.

An approach particularly designed to address the needs of jurisdictions with limited capacity to perform benchmark studies, ensuring greater tax certainty and reducing compliance burdens for both taxpayers and tax administrations. Contrary to Pillar Two, no thresholds apply for the S&S approach, hence the size of a company is not relevant. The approach can be implemented by jurisdictions starting from accounting periods that begin on or after 1 January 2025.

Applying the S&S approach



SS_approach.png

Step 1: Is the transaction in scope?



Transaction.png

The qualifying transactions in-scope refer to:

  • Buy-sell marketing and distribution transactions for wholesale distribution of tangible goods to unrelated parties;
  • Sales agency and commissionaire transactions where the agent or commissionaire contributes to wholesale distribution of tangible goods to unrelated parties.

Wholesale is defined as distribution to clients excluding endcustomers. Hence, retail is excluded from the S&S approach. Note that companies combining both wholesale and retail activities, can apply the S&S approach insofar as the retail activities do not exceed 20% (calculated based on the weighted average of the last years) of the total revenue.

Transactions involving the distribution of non-tangible goods, services or commodities are out of scope. Additionally, transactions where the tested party engages in non-distribution activities may be excluded unless these activities can be strictly separated and accurately priced.

The qualifying transactions are assessed against a set of qualitative and quantitative criteria to determine their eligibility for the S&S approach:  

  • Qualitative scoping criteria: The transaction must be priced using a one-sided transfer pricing method (the transactional net margin method with a return on sales as a profit level indicator) whereby the distributor, sales agent or commissionaire is considered the tested party assuming that they don’t own unique and valuable intangibles and/or assume economically significant risk.
  • Quantitative criteria: To ensure that only companies performing routine distribution activities fall within the scope of the S&S approach, the annual operating expenses of the relevant group companies responsible for routine marketing and distribution activities should not be lower than 3% or greater than the upper bound of between 20% to 30% of their net revenues The exact percentage (20% - 30%) can be chosen by the jurisdiction itself. The operating expense intensity should be calculated on a three-year weighted average basis.

Step 2: How will the transaction be priced?

The OECD published a factsheet explaining how in-scope transactions should be priced using the S&S approach. The S&S approach follows a formulaic approach to determine a return on sales for in-scope distributors. The foundation of the S&S approach is the pricing matrix, which computes a return on sales based on information gathered from a global dataset of companies involved in baseline marketing and sales activities. It considers the industry of the company and other quantitative ratios, such as net operating asset intensity and operating expense intensity. To complement the pricing matrix, the S&S approach offers two additional mechanisms that can adjust the pricing if needed based on the specific situation.

Additionally, the OECD has introduced a Pricing Automation Tool to automatically compute the return on sales for an in-scope tested party, requiring (minimal) data input.  The Tool is designed to further optimize the administrative and simplification benefits of this approach for both tax administrations and taxpayers.

TP-documentation

Transfer Pricing documentation is still crucial to ensure that tax administrations have sufficient and reliable information to assess whether taxpayers meet the criteria and have correctly applied the S&S approach to their transactions. It is essential to include an explanation of the delineation of the in-scope qualifying transaction including the functional analysis, written agreements, necessary calculations, and reconciliation of figures in the local file. It should also clearly illustrate the logical process that led to the results of this methodology.

Implementation of the S&S approach

As of 1 January 2025, jurisdictions can decide to implement the S&S approach. Countries that adopt the approach can make it mandatory for in-scope distributors in their jurisdictions or they can retain it as a safe harbor. The optional nature of the S&S approach and its implementation adds another layer of complexity for enterprises. Challenges of double taxation may arise if there is a transaction between an enterprise in a jurisdiction that subscribes to the S&S approach and an enterprise in a jurisdiction that does not subscribe to the S&S approach.

The outcome of the S&S approach will not be binding for the jurisdictions that did not choose to apply this approach. An exception to this is that the members of the Inclusive Framework are committed to respecting the outcome of the standardized approach with respect to covered jurisdictions. Above that they also agreed to take the necessary measures to eliminate double taxation, insofar as there is a tax treaty between those jurisdictions. The OECD published a list of 66 covered jurisdictions for purposes of the Inclusive Framework political commitment on the S&S approach.

The Model Competent Authority Agreement (MCAA) is designed to facilitate the implementation of the political commitment on the S&S approach, and provides model provisions to respect the application of the S&S approach by a covered jurisdiction. Jurisdictions can choose to use MCAA to implement the political commitment where there is a tax treaty in place.

For this project to succeed it is crucial that jurisdictions choose to apply the S&S approach. So far, Belgium has not taken a formal stance on the implementation of the S&S approach. Some countries, like the Netherlands, New Zealand and Australia, have explicitly stated not to apply this approach for in-country baseline marketing and distribution activities. At the end of 2024, the US published a Treasury Notice implementing the S&S approach for in-scope distributors. However, the new Trump administration is unlikely to be a strong champion for any BEPS initiatives, including Amount B. To conclude, few countries have taken action to implement the S&S approach for in-scope distributors.

What is next?

There is a need to closely monitor the implementation of the S&S approach by different countries and adjust the distribution pricing strategy based on the position of the countries involved. Although from a theoretical standpoint the S&S approach could lead to a streamlined and simplified method, it remains to be seen whether this will be the case.

For any further questions or assistance, please do not hesitate to contact your trusted Tiberghien advisor. 


 Authors : Tine Slaedts & Stefanie Van der Straeten