Two-pillar model for fairer global corporate taxation
The OECD's so-called two-pillar model is intended to reorganise corporate tax law worldwide and ensure fairer taxation of multinational companies overall. While the second pillar (Pillar Two) includes the introduction of a global minimum tax rate of 15%, the first pillar (Pillar One) aims to expand and redistribute taxing rights in favour of market states over resident states. Pillar One applies in full to very large corporate groups with an annual turnover of more than €20 billion and a return on sales of more than 10 per cent. This is clearly aimed at the large and highly profitable US technology groups.
Final report on Amount B published
In addition to this redistribution rule, Pillar One also contains Amount B, a regulation to simplify and standardise simple sales and marketing activities that apply to all internationally operating companies. After the OECD published two consultation papers in December 2022 and July 2023, the final report on Amount B followed on 19 February 2024. The approach is intended to reduce the number of potential disputes regarding the transfer pricing of distribution companies within an international group and also minimise the risk of resulting double taxation. This should provide affected companies with more planning certainty.
Applicable for certain sales companies
The scope of the report covers sales companies, which include wholesalers (distributors) as well as commercial agents and commission agents. Retail activities are generally harmful if they account for more than 20 % of sales on a three-year average. In addition, the distribution activity must relate to tangible items (goods). The distribution of intangible assets is excluded, as is trading in commodities and the provision of services. Distribution must be categorised as a routine activity in the broadest sense, which means that the possession and use of valuable intangible assets (e.g. trademarks and patents) are regularly excluded. In addition, a predefined range of operating expenses limits the scope of Amount B.
Step-by-step determination of a net margin
If a distribution company falls within the scope of Amount B, the transaction-based net margin method (TNMM) is considered to be the most suitable method for determining its transfer prices. For the distribution company as a tested party, a net return (EBIT in relation to sales) is determined in the form of a bandwidth, which is calculated according to the following scheme:
- Firstly, the company is categorised into one of three industry groups according to the type of products sold.
- The factor intensity is then determined by comparing operating assets and operating expenses in relation to sales. This results in a categorisation into one of five classes.
- The combination of industry group and factor intensity class results in a target margin of between 1.50 per cent (simplest industry group, lowest factor intensity) and 5.50 per cent, whereby fluctuations within a range of +/- 0.5 percentage points around the target margin are permitted.
- In order to adjust for cases where the functional profile of the sales companies is particularly high or low, the ratio of operating assets to sales is limited upwards and downwards by a cap and collar mechanism.
- Finally, the net margins calculated after the previous steps are adjusted (increased) depending on the credit rating of the respective country. The poorer the rating, the higher the (risk) premiums for the return to be achieved. In the case of a good or very good rating (up to and including BBB), the surcharge does not apply.
Individual states can prescribe or authorise simplification rules
The returns determined as part of Amount B are to be understood as target margins to which the sales companies should be steered - if necessary by applying year-end adjustments (outcome testing). The margins were determined using a comprehensive global database analysis commissioned by the OECD. In this way, companies and tax authorities are to be spared having to carry out their own time-consuming and, in case of doubt, dispute-prone analyses. This is the central aspect of simplification.
The rules on Amount B will be included in the OECD Transfer Pricing Guidelines as an annex to Chapter 4 (Administrative approaches to avoid and resolve transfer pricing conflicts). It is now up to the individual countries to decide whether to apply the regulations - either mandatorily or optionally as a safe harbour - or to continue to follow the generally applicable rules. Application should be possible for all financial years beginning on or after 1 January 2025. We will provide further information here on how national legislators and tax authorities in Germany and other key countries are positioning themselves.
OECD/G20 Base Erosion and Profit Shifting Project: Report on Pillar One - Amount B of 19 February 2024