OECD's simplified approach to the evaluation of transactions

OECD's new Simplified Approach under Amount B streamlines evaluations for marketing and distribution transactions. This update offers clear criteria and a simplified pricing matrix, reducing complexity and enhancing clarity in cross-border transactions. Discover how it could impact your business!

OECDINTERNATIONAL TAXTRANSFER PRICING

7/16/20241 min read

Exciting Update on Transfer Pricing! As part of the OECD guidance on Amount B, a Simplified Approach has been introduced to streamline the evaluation for certain transactions.

Here's what you need to know:

Qualifying Transactions & Scope:
  • Applicable to buy-sell marketing, distribution transactions, and sales agency or commissionaire setups.

  • Requires reliable pricing using a one-sided transfer pricing method.

  • Tested party’s annual operating expenses must be between 3% and 30% of annual net revenues.

Exclusion Criteria:
  • Excludes transactions involving non-tangible goods or commodities.

  • Also excluded are scenarios where the tested party undertakes significant non-distribution activities, such as manufacturing or substantial service delivery, unless these can be reliably priced and evaluated separately.

  • This ensures that only transactions that are straightforward and have less ambiguity in their pricing are included under this simplified scheme.

Key Financial Terms:
  • Operating Expenses: Excludes COGS, pass-through costs, financing, investment activities, and taxes.

  • Net Operating Asset Intensity (OAS) and Operating Expense Intensity (OES): Both are calculated on a three-year weighted average basis.

Industry Grouping:
  • Group 1: Perishable foods, construction materials, household consumables.

  • Group 2: IT hardware, pharmaceuticals, consumer electronics.

  • Group 3: Medical and industrial machinery, and other industrial supplies.

Simplified Pricing Matrix:
  • A structured method to determine suitable returns for distribution activities based on industry group, OAS, and OES ratios.

  • Requires taxpayers to document proof of qualification and proper method application.

This approach aims to reduce complexity and ensure a more uniform application of transfer pricing rules. It’s a significant step towards clarity and efficiency in cross-border transactions.

Could this be a game-changer for international business operations?

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