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Streamlining Transfer Pricing in Distribution: A Landmark Decision

The Organization for Economic Cooperation and Development (OECD), in alliance with the G20, released a pivotal report on February 19, 2024, under the Inclusive Framework on BEPS. This report, focusing on Amount B of Pillar One, is a game-changer for Baseline Marketing and Distribution Activities (BMDA), particularly benefiting low-capacity countries. It redefines the arm’s length principle application, making it more accessible and practical.

What’s New: Applicability and Exclusions

The new approach is tailored for specific transactions, primarily involving the distribution of tangible goods by affiliates. It simplifies the transfer pricing method, especially for wholesale transactions, sales agencies, and commissionaire arrangements. However, it sets boundaries, excluding intangible goods, services, and non-distribution activities like manufacturing and R&D unless they can be independently assessed.

Key Takeaways: From Methodology to Tax Certainty

Flexibility in Adoption: Jurisdictions have the discretion to adopt this approach from 2025. It’s an optional framework, with the choice of making it binding or a safe harbor for taxpayers.

Preferred Pricing Method: The Transactional Net Margin Method (TNMM) is generally preferred, with allowances for the Comparable Uncontrolled Price (CUP) method in specific scenarios.

Robust Pricing Framework: A comprehensive pricing matrix developed from global data guides the determination of returns, ensuring fairness and consistency.

Documentation Essentials: Taxpayers must provide detailed documentation to support their transfer pricing arrangements under this new regime.

Tax Certainty and Dispute Resolution: This approach aims to minimize tax disputes, using established mechanisms like APAs and MAPs to resolve disagreements.

India’s Perspective: India has voiced concerns regarding certain aspects of the proposal, indicating a need for further clarity and consensus among participating countries.

KNAV’s Perspective

The implementation of Amount B holds significant potential for reducing transfer pricing disputes, particularly in low-capacity jurisdictions. However, its optional nature raises questions about its efficacy in ensuring tax certainty and preventing double taxation. Companies involved in relevant activities must proactively assess these changes to stay ahead.