Impact of BEPS 2.0 Amount B on Swiss Groups

The new guidance will have a wide-spread impact on how common intragroup distribution activities are priced and how transfer pricing policies are assessed by the tax authorities. Even where countries do not stipulate that taxpayers must follow the new guidance, the profitability levels that the report includes will provide a reference point for tax authorities assessing distribution transfer pricing policies.

Key takeaways for Swiss Groups

• Unlike for Amount A of Pillar 1 of BEPS 2.0 – there are no minimum size thresholds for the application of Amount B. Amount B will therefore apply to a wide range of groups, entities and industries.
• The scope of Amount B rules (now referred to as “simplified and streamlined approach”) is limited to wholesale distribution of tangible goods and does not cover the distribution of services (including digital services).
• The definition of “distributor” covers buy-sell distributors but also sales agents, and commissionaires involved in the sale of goods – these are all common business models applied by Swiss groups.
• A set of rules has been put in place to determine whether a distributor’s activities qualify as “baseline” distribution and marketing activities – with more guidance coming by end of March. The rules require that a functional analysis and an accurate delineation analysis are performed to determine whether an entity is in scope of the new rules or not.
• The guidance includes a pricing matrix outlining the specific profitability levels for different types of entities. The matrix has been slightly updated compared to earlier drafts but the overall target reference values still range from 1.5% to 5.5%. Which rate applies depends on the industry, jurisdiction as well as operating asset and operating expense intensity of each qualifying entity. 
• The application of the pricing matrix may result in target profit levels above those typically applied by Swiss Groups or Swiss based affiliates of foreign MNEs.

One of the key elements of this new framework, hotly debated within the OECD IF group of countries, is the question of whether taxpayers should have the option or the obligation to apply the new rules. In this regard the OECD leaves it up to jurisdictions to decide how and whether to implement the new approach. This means that taxpayers will have to monitor which countries implement the new framework and how it is implemented by each country. This inconsistent application may lead to situations in which groups will be faced by the tax authorities in a distribution location expecting that the Amount B profit level will be applied whilst the tax authority in a counter-party location expects the profit level to be determined based on a traditional transfer pricing analysis. 

Timeline and the road ahead

The report specifies that the Amount B simplified and streamlined approach is now part of Annex to Chapter IV to the OECD TPG and that further technical guidance will also be published and incorporated before the end of March 2024. Local jurisdictions can then begin to apply this new framework for fiscal years commencing on or after 1 January 2025. In practice, we observe a number of tax authorities already using the pricing matrix (first published in July 2023 draft consultation report) as a high-level reference point for the expected EBIT margins to be achieved by baseline distributor entities (for example in APA / MAP negotiations).

In order to prepare for the incoming impact of the Amount B framework, MNE Groups should primarily focus on:

• Scope impact analysis – perform an analysis to determine which group companies would fall within the scope of Amount B based on their functional profile
• Profit allocation impact assessment – perform an analysis to determine the countries where material differences exist between current transfer pricing policies and profit levels, and the profit levels outlined in the Amount B pricing matrix
• Monitor – which countries indicate an intention to implement the new framework and the way in which they intend to implement it
• Transfer pricing model readiness review - determine the need and/or potential to adjust the current roles and profiles of group entities engaged in distribution activities to ensure that it is clear which entities fall within or out of scope of the new framework

The publication of the Amount B framework represents an important development to the global transfer pricing framework of guidelines and regulations and this publication signifies a key milestone for the OECD IF on BEPS 2.0 Pillar 1. With this new guidance now becoming part of the OECD TPG, which are expressly referenced by the Swiss tax authorities and many other jurisdictions, MNEs should ensure they are prepared. We will continue to provide further technical updates and practical guidance on these developments in our subsequent blog posts.