For groups that operate in multiple jurisdictions, Transfer Pricing is at the core of the accurate calculation of (taxable) profit. Although the OECD Transfer Pricing Guidelines provide a general framework, local jurisdictions may have additional or different rules and interpretations. Given this complexity, businesses face an increasing need for a proper and consistent substantiation and documentation of intragroup transactions.
Local distribution is one area in which a consistent transfer pricing approach may be required within a group of companies. To simplify and streamline the calculation of an at arm’s length remuneration for baseline marketing and distribution activities the OECD’s Pillar One initiative offers a standardised formula known as: “Amount B”.
In this article our Transfer Pricing experts discuss the scope, eligibility and the practical application of Amount B.
Baseline marketing and distribution: comparability and alternative approach
To ensure transactions within a group of businesses do not lead to arbitrary pricing or profit shifting, such transactions should be priced ‘at arm’s length’. Transfer Pricing, or “TP”, offers a number of methods to ensure that remuneration and conditions between group companies meet this condition. This generally involves finding comparable transactions between non-related entities, with the use of the OECD’s Transfer Pricing Guidelines, other international transfer pricing frameworks, and local TP rules.
However, finding a comparable may be a complicated and costly matter, requiring significant effort and expertise. Many groups use local marketing and distribution entities in different countries, which often perform routine or limited-risk activities. Such activities are remunerated with a stable return on sales. The question is how to find comparable companies that engage in similar ‘basic’ activities and assume similar limited risks.
Generally speaking, a standard distribution benchmarking study would yield a set of companies engaged in “standard” marketing and distribution activities and assuming “standard” business risks. The adjustment to arrive at a limited activity and limited-or-no-risk scenario would normally be impossible to perform. On top of that, different countries may require different methodologies and local transfer pricing rules to be considered. These factors may result in relatively high compliance costs.
As part of the OECD’s Unified Approach under Pillar One, Amount B streamlines transfer pricing for baseline marketing and distribution activities by offering a standardised formula. This aims to reduce disputes as well as compliance burdens. The new framework will be effective for the so-called “covered jurisdictions” and other countries which voluntarily adopt the approach, for financial years starting on or after January 1, 2025.
Eligibility and scope of Amount B
The standardised methodology of Amount B covers various baseline marketing and distribution functions, such as buying goods for resale, promotional activities, warehousing, customer identification, sales processing, invoicing, and customer support. Amount B is either mandatory or optional for in-scope entities and transactions, depending on the choices made in that jurisdiction. Please note: the Netherlands has not recognised Amount B as an accepted method for Dutch baseline marketing and distribution transactions. However, the Dutch Tax Authorities will accept the outcome of the approach for a transaction with a Dutch taxpayer if Amount B is properly applied in a counterparty’s jurisdiction.
Our experts discuss the covered jurisdictions and the relevance of Amount B in the Netherlands [Read more here].
For the Amount B approach to be applicable, the covered transactions must first of all exhibit economically relevant characteristics (i.e., wholesale distribution, agency or commissionaire transactions). Second, a one-sided transfer pricing method such as the transactional net margin method or “TNMM” should be considered the most appropriate for pricing such transactions, and the distributor should be the tested party (a sales agent or commissionaire also qualifies if they contribute to wholesale distribution transactions to third parties). The tested party's annual operating expenses should be between 3% and 20-30% of the relevant annual net revenues.
Transactions involving non-tangible goods or services, commodities, and transactions where the relevant party engages in non-distribution activities, are not in scope of the Amount B approach. A company which performs both covered and excluded activities, could still apply the Amount B approach if the excluded activities can be properly distinguished from covered activities, and be reliably priced in a separate manner.
Key actions for businesses: assess applicability and consequences
In practice, we see that the impact of the Amount B approach is highly underestimated. Many businesses have not even started to assess the applicability and potential consequences, even though these challenges must be addressed in 2025. We advise businesses to analyse the relevant framework and determine:
whether (and which) group entities conduct baseline distribution and marketing operations,
whether such operations occur in covered jurisdictions,
whether this concerns mandatory or optional application of the Amount B approach, and
whether any adjustments are required (or beneficial) to align with the new framework.
In addition, Amount B could be used by groups of companies as a valuable tool to align the approach within the covered jurisdictions and optimise the relevant compliance processes (minimising costs in the process). Although the initial set-up may require some effort, the approach could be used to ensure consistency and local compliance. The potential savings in time and costs are quite significant.
The Transfer Pricing experts at Baker Tilly would be happy to assist you in this matter. If you have any questions about Amount B, TP compliance or our transfer pricing advisory services, please do not hesitate to contact our Transfer Pricing Desk.
The legislation and regulations in this area may be subject to change. We recommend that you discuss the potential impact of this with your Baker Tilly advisor.
