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On 17 June 2024 the OECD Inclusive Framework (IF) published additional guidance (June Guidance) on the Pillar One Amount B Report of February 2024 (Report). The Report provides an optional simplified and streamlined approach (S&S Approach) to price baseline marketing and distribution activities (BMDA). The key takeaway of the June Guidance is that it provides definitions and lists of 'Qualifying' and 'Covered' Jurisdictions for application of the S&S Approach. The lists of Qualifying Jurisdictions should be used when performing the operating expense cross-check (Operating Expense Cross-Check) and data availability mechanism (Data Availability Mechanism). Following this June Guidance, IF members commit to respect outcomes under the S&S Approach when it is applied by any of the Covered Jurisdictions.

Background

Transfer pricing disputes relating to BMDA may result in challenges for tax administrations and compliance burdens for taxpayers. The S&S Approach (formerly known as Amount B of Pillar One) is incorporated as annex into the OECD Transfer Pricing Guidelines and aims to enhance compliance and efficiently resolve disputes. The June Guidance completes certain design aspects of the S&S Approach, allowing jurisdictions to start implementation as of 1 January 2025.

For more background on the S&S Approach and the Report we refer to our previous website post.

Pricing under the S&S Approach

Under the S&S Approach, the remuneration of BMDA is in principle determined by the use of a pricing matrix (Pricing Matrix) included in the Report. This remuneration shall, however, be subject to (potential) profitability adjustment mechanisms, being (i) the Operating Expense Cross-Check and (ii) the Data Availability Mechanism. These profitability adjustment mechanisms are addressed in the Report and can be applied by relying on the lists of 'Qualifying Jurisdictions' published in the June Guidance.

Pricing Matrix

The return on sales (RoS) remuneration for BMDA shall under the S&S Approach in principle be determined through the Pricing Matrix by assessing the tested party's (i) net operating asset intensity (OAS), (ii) operating expense intensity and (iii) industry group. The return provided in the Pricing Matrix will be considered acceptable within a range of plus or minus 0.5%.

Operating Expense Cross-Check

The Operating Expense Cross-Check serves as a safeguard within the S&S Approach to ensure that the RoS remuneration derived from the Pricing Matrix falls within an acceptable range and entails the following four-step process:

Step 1 – the tested party determines its RoS based on the Pricing Matrix and computes an equivalent Return on Operating Expenses (RoOE) derived from that return.
Step 2 – the tested party determines the applicable operating expense cap-and-collar range. Tested parties can either be subject to default cap rates or alternative cap rates for 'Qualifying Jurisdictions'. Also, the OAS of the tested party is considered in this step.
Step 3 – the tested party compares the equivalent RoOE against the operating expense cap-and-collar.
Step 4 – where the equivalent RoOE of the tested party exceeds the operating expense cap, the RoS of the tested party will be adjusted downwards until it results in an equivalent RoOE equal to the operating expense cap.

Data Availability Mechanism

The Data Availability Mechanism provides under certain circumstances for upward adjustments to the RoS remuneration derived from the Pricing Matrix and the Operating Expense Cross-Check where applicable. The mechanism is intended to account for cases where there is no or insufficient data in the global dataset for a particular tested party jurisdiction to validate the appropriateness of the Pricing Matrix coupled with evidence that that jurisdiction could be reasonably considered a 'higher risk' jurisdiction. Sovereign credit ratings are used as a proxy to determine 'higher risk' jurisdictions and to quantify the applicable adjustment under the mechanism. The upward adjustment is determined by multiplying the following variables:

Where —

NRA is the net risk adjustment percentage of the Qualifying Jurisdiction derived from a table where the applicable cell is determined by reference to the sovereign credit rating of the Qualifying Jurisdiction of the tested party applicable on the first day of the relevant fiscal year.
OAS is the OAS of the tested party for the relevant fiscal year, but this OAS will not exceed 85% for the purpose of computing this adjustment.

June Guidance

In the June Guidance, lists of 'Qualifying Jurisdictions' within the meaning of the Operating Cross-Check and the Data Availability Mechanism have been published. Additionally, the June Guidance provides a list of 'Covered Jurisdictions' to whom the IF extended its political commitment to respect outcomes under the S&S Approach if this approach is applied by any of these jurisdictions.

Qualifying Jurisdictions within the meaning of the Operating Expense Cross-Check

In Step 2 of the Operating Expense Cross-Check, tested parties can either be subject to default cap rates or alternative cap rates, with the latter applicable when the tested party is located in a 'Qualifying Jurisdiction'. The list of Qualifying Jurisdictions within the meaning of the Operating Expense Cross-Check will be fixed prospectively, published and updated every 5 years on the OECD website. It should be noted that the list of Qualifying Jurisdictions does not imply that the listed jurisdictions are obligated to adopt or will adopt the S&S Approach.

List of Qualifying Jurisdictions within the meaning of the Operating Expense Cross-Check – June 2024

Qualifying Jurisdictions within the meaning of the Data Availability Mechanism

According to the June Guidance, only non-European Union jurisdictions with (i) a publicly available long term sovereign credit rating of BBB+ (or equivalent) or lower from a recognized independent credit rating agency, and (ii) less than 5 comparables in the global dataset are considered to be Qualifying Jurisdictions within the meaning of the Data Availability Mechanism. The list of Qualifying Jurisdictions within the meaning of the Data Availability Mechanism will also be fixed prospectively, published and updated every 5 years on the OECD website. Additionally, it should be noted that the list does not imply that the Qualifying Jurisdictions are obligated to adopt or will adopt the S&S Approach.

List of Qualifying Jurisdictions within the meaning of the Data Availability Mechanism – June 2024

Afghanistan l Albania l Algeria l Andorra l Angola l Argentina l Armenia l Azerbaijan l Bahrain l Bangladesh l Barbados l Belarus l Belize l Benin l Bhutan l Bolivia l Botswana l Brazil l Burkina Faso l Burundi l Cabo Verde l Cambodia l Cameroon l Central African Republic l Chad l Comoros l Congo l Cook Islands l Costa Rica l Côte d'Ivoire l Cuba l Curaçao l Democratic Republic of the Congo l Djibouti l Dominica l Dominican Republic l Ecuador l Egypt l El Salvador l Equatorial Guinea l Eritrea l Eswatini l Ethiopia l Fiji l Gabon l Gambia l Georgia l Ghana l Grenada l Guatemala l Guinea l Guinea-Bissau l Haiti l Honduras l Indonesia l Iraq l Jamaica l Jordan l Kazakhstan l Kenya l Kiribati l Kosovo l Kyrgyzstan l Lao People's Democratic Republic l Lebanon l Lesotho l Liberia l Libya l Madagascar l Malawi l Malaysia l Maldives l Mali l Marshall Islands l Mauritania l Mauritius l Mexico l Micronesia l Moldova l Mongolia l Montenegro l Montserrat l Morocco l Mozambique l Myanmar l Namibia l Nepal l Nicaragua l Niger l Nigeria l North Macedonia l Oman l Pakistan l Palau l Panama l Papua New Guinea l Paraguay l Peru l Philippines l Rwanda l Saint Lucia l Saint Vincent and the Grenadines l Samoa l San Marino l Sao Tome and Principe l Senegal l Seychelles l Sierra Leone l Solomon Islands l Somalia l South Africa l South Sudan l Sri Lanka l Sudan l Suriname l Syrian Arab Republic l Tajikistan l Tanzania l Timor-Leste l Togo l Tonga l Trinidad and Tobago l Tunisia l Turkmenistan l Turks and Caicos Islands l Tuvalu l Uganda l Uruguay l Uzbekistan l Vanuatu l Venezuela l West Bank and Gaza Strip l Yemen l Zambia l Zimbabwe

Extended political commitment towards Covered Jurisdicitons

The Report stated that IF members commit to respect the outcomes determined under the S&S Approach for in-scope transactions when applied by a low-capacity jurisdiction. They also agreed to take all reasonable steps to relieve potential double taxation arising from the S&S Approach, provided there is a bilateral tax treaty in effect between the relevant jurisdictions. With respect to this commitment, the June Guidance no longer refers to a 'low-capacity jurisdiction' but uses the neutral term 'Covered Jurisdiction' to allow for a broader application. The June Guidance mentions that the replacement of 'low-capacity jurisdiction' with 'Covered Jurisdiction' follows the extension of commitment to certain low- and middle-income OECD and G20 members. This extended political commitment relates in particular to low- and middle-income OECD and G20 member countries that expressed their willingness to apply Amount B before March 2024 (e.g., Argentina, Brazil, Costa Rica, Mexico, and South Africa).

The June Guidance mentions that the inclusion of any additional countries in the list of Covered Jurisdictions for the IF political commitment will be subject to approval by the IF but may be requested by any non-IF member meeting the criteria. Besides the review of the list every 5 years, IF members are free to extend their political commitment to any other IF or non-IF member on a bilateral basis.

List of Covered Jurisdictions for the IF political commitment on Amount B – June 2024

Albania l Angola l Argentina l Armenia l Azerbaijan l Belarus l Belize l Benin l Bosnia and Herzegovina l Botswana l Brazil l Burkina Faso l Cabo Verde l Cameroon l Congo l Costa Rica l Côte d'Ivoire l Democratic Republic of the Congo l Djibouti l Dominica l Dominican Republic l Egypt l Eswatini l Fiji l Gabon l Georgia l Grenada l Haiti l Honduras l Jamaica l Jordan l Kazakhstan l Kenya l Liberia l Malaysia l Maldives l Mauritania l Mauritius l Mexico l Moldova l Mongolia l Montenegro l Morocco l Namibia l Nigeria l North Macedonia l Pakistan l Papua New Guinea l Paraguay l Peru l Philippines l Saint Lucia l Saint Vincent and the Grenadines l Samoa l Senegal l Serbia l Sierra Leone l South Africa l Sri Lanka l Thailand l Togo l Tunisia l Ukraine l Uzbekistan l Viet Nam l Zambia

What can taxpayers do?

Taxpayers can assess, taking into account the now published lists on Qualifying and Covered Jurisdictions, whether (i) their activities are in scope for the application of the S&S Approach, and (ii) remunerations of their marketing and distribution activities align with the returns from the Pricing Matrix, taking into account the profitability adjustments.

Entry into force

Jurisdictions can choose to apply the S&S Approach for fiscal years beginning on or after 1 January 2025.

We will keep you informed about further developments. Should you have any questions or need assistance in assessing the impact of the June Guidance, please contact a member of our Transfer Pricing team or your trusted Loyens & Loeff adviser.

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.

OECD Publishes Additional Guidance On The S&S Approach (Pillar One Amount B)

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