CA Deepak Goel – [2024] 169 taxmann.com 531 (Article)
1. Background
OECD has introduced BEPS (Base Erosion and Profit Shifting) Pillar One (Amount A and Amount B) and Pillar Two primarily to address the tax issues and challenges posed by rapid digitalisation of economies.
- Pillar 2 establishes a Global Anti-Base Erosion (GloBE) framework, imposing a minimum tax rate of 15% on large MNEs.
- Pillar 1 (Amount A) reallocates taxing rights over residual profits to ‘market jurisdictions’ to ensure that taxes are paid in the jurisdictions where economic activity occurs.
- Pillar 1 (Amount B) is an attempt to simplify the existing transfer pricing rules for all the taxpayers, whereas Pillar 2 applies on large MNEs, and Pillar 1 (Amount A) applies on very large and profitable MNEs.
2. Scope
The focus of Amount B is on the application of transfer pricing rules to “baseline marketing and distribution activities”. This refers to the allocation of profits and costs among different entities within a MNE engaged in marketing and distribution of goods or services. Baseline activities typically involve routine marketing and distribution functions (such as advertising, sales support, or logistics) that do not involve valuable intangibles or certain economically significant risks. Transfer pricing rules help to ensure that these activities are properly valued for tax reporting purposes, preventing profit shifting to low-tax jurisdictions and ensuring fair compensation for each entity involved in these baseline operations.
Prime focus of Amount B is on the wholesale distribution of goods, including commissionaires & sales agents and de minimis retail sales are allowed (20% of the total net revenue). It excludes from scope the performance of services and distribution of commodities.
3. Purpose
Aiming to provide a standardized and simplified approach, Amount B is intended to increase tax certainty, reduce compliance and administrative costs to assist low-capacity jurisdictions (‘LCJ’) that often suffer from the absence of local market comparables.
Reports from some low-capacity jurisdictions suggest that transfer pricing disputes related to distribution activities account for 30% to 70% of all transfer pricing disputes in those regions. This highlights the significant role that distribution activities play in transfer pricing conflicts, particularly in jurisdictions with limited resources for handling such issues. Standardized rules will help in reducing the litigation.
4. Methodology
Amount B establishes a standard methodology for calculating a “baseline” return for routine marketing and distribution activities, based on a simplified set of criteria that will apply across all jurisdictions involved. This includes a standardized formula for determining the return to a group entity for performing routine functions, regardless of the specific market in which they operate. The aim is to reduce the complexity and administrative burden of transfer pricing compliance.
For example, if a multinational company sells products in multiple countries, the Amount B rules could help to determine how much profit should be allocated to each jurisdiction based on its routine activities, such as the distribution of the products, without needing to engage in lengthy and costly transfer pricing studies. This will help in reducing the compliance and administrative costs.
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