On 19 February 2024 the OECD/G20 Inclusive Framework released the report on Amount B of Pillar One, following a previous consultation. The report sets out how jurisdictions can choose to apply the simplified and streamlined approach to qualifying transactions of eligible baseline distributors.
Jurisdictions can choose to apply the simplified and streamlined approach to the qualifying transactions of in-scope tested parties. The approach would apply for fiscal years commencing on or after 1 January 2025. The outcome of the approach is non-binding on the counter-party jurisdiction where the associated enterprise that is a party to the controlled transaction is located, however, members of the Inclusive Framework commit to respect the outcome from using the approach where it is applied by a low-capacity jurisdiction. They also agree to take reasonable steps to relieve potential double taxation arising, if there is a bilateral tax treaty in effect.
Competent authority agreements will be developed for use within the context of bilateral tax treaty relationships. Work will also continue on the design elements of the streamlined approach. The Inclusive Framework will agree on the list of low-capacity jurisdictions by 31 March 2024.
The Inclusive Framework is currently working on an additional optional qualitative scoping criterion that jurisdictions may choose to apply as an additional step to identify distributors performing non-baseline activities. This further work is to be concluded by 31st March 2024.
Options for application of the approach
A jurisdiction that chooses to apply the simplified and streamlined approach may apply the approach using one of two options. Under the first option, a jurisdiction can permit tested parties that are resident within its jurisdiction to elect to apply the simplified and streamlined approach. Under the second option, a jurisdiction can require the use of the approach in a prescriptive manner by its tax administration and by tested parties resident in the jurisdiction, if the scoping criteria are met.
Qualifying transactions
The report defines the qualifying transactions that fall within the scope of the simplified and streamlined approach, and the characteristics of in-scope distributors. For example, in-scope distributors should not own unique and valuable intangibles or take on certain economically significant risks.
The approach allows in-scope distributors to perform non-distribution transactions when they can be adequately evaluated and reliably priced on a separate basis under the general principles of the OECD Guidelines. The approach also permits a de minimis level of retail sales. The distribution of digital goods, commodities and services is excluded from the scope of the streamlined approach.
Most appropriate method
In view of the economically relevant characteristics of in-scope transactions and the information available, the transactional net margin method is the most appropriate method to use under the approach. The report notes that there may be some situations where the application of the comparable uncontrolled price method, using internal comparables, could be more appropriate.
Three-step process
The report outlines a three-step process for determining a return on sales for an in-scope distributor. This aims to provide an approximation of an arm’s length result. This pricing framework includes a matrix of returns ; an operating expense cross-check mechanism; and a data availability mechanism.
Documentation
Much of the documentation covering the transactions under the simplified and streamlined approach may already be available in the local file. This would include delineation of the in-scope qualifying transaction and functional analysis; relevant written contracts or agreements; and calculations showing the relevant revenue, costs and assets allocated to the in-scope transaction. Financial information on the tested party, such as financial accounts for the relevant periods, will be needed to understand whether the qualifying transaction meets the scoping criteria.
Other issues
The report deals with measures on tax certainty and the elimination of double taxation, and also covers transitional issues.
