New OECD Pillar One guidance for baseline distribution activities

A simplified transfer pricing approach

Mar 06, 2024
Income & franchise tax Business tax International tax Transfer pricing

Executive summary:

The Organisation for Economic Cooperation and Development (OECD)/G20/Inclusive Framework released guidance entitled “Pillar One – Amount B” (OECD Guidance) on Feb. 19, 2024. The guidance relates to a new approach for pricing baseline marketing and distribution activities within multinational groups. This pricing approach, formerly known as “Amount B,” is now referred to as the Simplified and Streamlined Approach (SSA). The OECD Guidance has been incorporated into the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 as an Annex to Chapter IV and represents the OECD’s ongoing work on base erosion and profit shifting (BEPS).

The SSA would replace the comparables benchmarking currently used to meet transfer pricing requirements for eligible taxpayers and transactions. The SSA will begin for years beginning on or after Jan. 1, 2025. Additional guidance is expected from the OECD by March 31, 2024.

Benefits anticipated

The SSA is intended to simplify and streamline the application of the arm’s length principle for baseline marketing and distribution activities, especially focusing on “low-capacity jurisdictions”, a term that is not defined in the OECD Guidance. The SSA also intends to cut compliance costs, enhance tax certainty, and mitigate tax disputes for taxpayers and taxing jurisdictions.

Relevant tax jurisdictions, taxpayers, and transactions 

Pillar One was originally expected to impact only the largest multinationals, but this guidance has no size threshold at all. Even small companies could be impacted.

Adoption by tax jurisdictions is voluntary. Tax jurisdictions which choose to adopt the SSA can implement the new approach either:

  • By mandatorily requiring taxpayers (with in-scope transactions) to apply the SSA; or
  • By offering the SSA as a safe harbor to taxpayers (with in-scope transactions), who can make an election. Once elected, a taxpayer must comply for a minimum of three years, unless one or more exclusions render the application of the SSA invalid.

The SSA applies to taxpayers engaging in:

  • Buy and sell marketing and distribution transactions, where the distributor purchases goods from one or more related parties for wholesale distribution to unrelated parties; and
  • Sales agency and commissionaire transactions, where the sales agent or commissionaire contributes to a related party’s wholesale distribution of goods to unrelated parties.


Excluded from the purview of the SSA are distributors that do either of the following:

  • Engage in the marketing and distribution of: non-tangible goods/digital goods; services; commodity products (a non-exhaustive list of examples is provided in the OECD Guidance); retail activities (where the de minimis threshold of 20% of sales is exceeded). Note that the original Amount B proposal was focused on digital goods, so this exclusion of digital goods represents a major change from the original vision;
  • Undertake a combination of distribution and non-distribution activities (e.g., manufacturing, research and development, procurement, financing) where an evaluation of a distribution transaction on a separate basis is inadequate or unreliable.

The SSA Approach

Application of the SSA would involve:

  1. Identifying qualifying transactions (i.e., appropriate baseline distribution activities).
  2. Applying quantitative filters (operating expense to sales) to exclude qualifying transactions with excessive functions or characterization for distributors that fall outside of scope; segmenting financial results, where necessary, to separate qualifying and non-qualifying activities or distinguish between categories of qualifying activities.
  3. Confirming that the transactional net margin method (TNMM) with a return on sales profit level indicator is the most appropriate method (ensuring that no unique and valuable contributions are owned by counterparties; operations are not highly integrated for the transacting parties; and assumption of economically significant risk is non existing for the distributor). The SSA provides for an exception to the TNMM to cover situations where the application of an internal comparable uncontrolled price (CUP) would be more appropriate and where reliable information for the application of the CUP is available.
  4. Determining the appropriate industry grouping from the three categories enumerated in the OECD Guidance. If more than one industry is relevant for over 20% of sales, results should be segmented and all relevant categories used.
  5. Calculating and determining factor intensity classification (utilizing net operating assets intensity and operating expense intensity) based on the distributor’s weighted average results of the previous three years, including the accounts payable guardrail test to compare credit terms.
  6. Identifying an appropriate return from the OECD’s pricing matrix (between 1.5% and 5.5%) derived from the global benchmarking analysis, or a weighted average return on sales where goods in more than one industry are distributed.
  7. Testing the actual result achieved by the distribution activities against the result from the pricing matrix ±0.5%.
  8. Applying an operating expense cross-check, a guardrail test of the ratio of operating profit (based on the pricing matrix) to sales against a pre-defined operating expense cap-and-collar range. Taxpayers would be expected to further adjust profitability that falls outside this range.
  9. Computing adjusted return on sales for higher levels of country risk where a tested party is located in a qualifying jurisdiction (a listing of qualifying jurisdictions is expected to be released by the OECD this month).


The SSA establishes information items included in the transfer pricing local file as useful to substantiate a taxpayer’s position for the SSA application for the first time even though the benchmarking analysis may be replaced by an analysis of the SSA for one or more transactions. Tax authorities may also request further information from a taxpayer where the information presented is considered inadequate.

The U.S. Perspective

The U.S. Treasury has been actively participating in negotiations with other jurisdictions around the terms of Pillar One, and has been supportive of the simplifying possibilities of the SSA. However, the U.S. authorities have urged that SSA be mandatorily adopted by all jurisdictions, and have further stated that adoption of Amount B should be tied with the other aspect of Pillar One, Amount A, to allow for a more comprehensive result.


  • The SSA will mean material changes in the way the pricing for distribution functions relating to tangible goods is set and supported going forward. This could impact the level of return that is accepted by some tax authorities as being at arm’s length, and so could either change a group’s effective tax rate, place them at risk of double taxation or both.
  • Adoption by jurisdictions is voluntary, and counterparty jurisdictions that do not adopt SSA are not obliged to abide by the results in tested party jurisdictions that do adopt SSA. This could lead to risk of double tax and reduce the intended benefits of simplification and enhanced tax certainty.
  • While the SSA is intended to ultimately simplify pricing and reduce the transfer pricing compliance burden on taxpayers, issues exist including reservations that are noted in the OECD Guidance that will need to be addressed ahead of the introduction of the rules from 2025.
  • Which jurisdictions will introduce the SSA rules and whether they offer them as an optional safe harbor or a requirement for taxpayers is to be seen. Those jurisdictions potentially subject to a net country risk adjustment for sovereign risk to the OECD’s pricing matrix are also still to be identified.
  • Characterization of the distribution activities will need to be periodically reviewed. This will depend on functional analysis, which should be tested against the qualification criteria set out in the Guidance. These findings will also be required to identify the appropriate industry for use in the calculation.
  • Identification of the relevant data and reporting processes required to test the distribution return, particularly where the results of those activities may need to be segmented between qualifying baseline distribution and other activities such as the provision of services, will be required.
  • Modeling the likely impact of the SSA and any change from existing returns for baseline distribution activities at an early stage will be key. This will be relevant both for qualifying distribution entities and group counterparties on the other side of transactions.
  • Developing and maintaining appropriate and robust transfer pricing documentation will minimize requests from tax authorities for additional information and help achieve the intended objectives from the SSA.
  • Active engagement of tax and finance teams with internal and external stakeholders throughout the introduction of the SSA will help manage expectations around the effective tax rate.

RSM contributors

  • Ramon Camacho
  • Tansy Jefferies
  • Jon Jenni
    Senior Director
  • Alka Hariawala
    Senior Manager

Tax resources

Timely updates and analysis of changing federal, state and international tax policy and regulation.

Subscribe now

Stay updated on tax planning and regulatory topics that affect you and your business.

Washington National Tax

Experienced tax professionals track regulations, policies and legislation to help translate changes.