Streamlining transfer pricing for marketing and distribution activities

Amount B is a concept introduced by the OECD as part of its ongoing efforts to simplify and standardise transfer pricing rules, particularly for low-value-adding intra-group services.

The primary objective of Amount B is to determine a fixed return for certain routine distribution activities, by establishing a fixed return on sales, ranging from 1.5% to 5.5%.

This is intended to reduce the complexity and administrative burden associated with transfer pricing compliance and disputes, especially for routine distribution functions that do not involve significant risks or intangibles.

Jurisdictions may face different challenges in applying the arm's length principle. For instance, if they have limited resources or difficulty finding reliable information, the simplified and streamlined approach may be found to be very useful, especially for local distributors.

The simplified and streamlined approach should make pricing easier by approximating an arm's length outcome within the tested party's jurisdiction.

A jurisdiction can choose to apply the simplified and streamlined approach in one of two ways:

1. A jurisdiction may allow resident parties to elect to apply the simplified and streamlined approach; or

2. It can mandate the use of the simplified and streamlined approach by its tax administration and resident parties, requiring taxpayers to use it when the scoping criteria are met.

The following controlled transactions are qualifying transactions for the simplified and streamlined approach:

• Buy-sell marketing and distribution transactions where the distributor purchases goods from one or more associated enterprises for wholesale distribution to unrelated parties; and
• Sales agency and commissionaire transactions where the sales agent or commissionaire contributes to one or more associated enterprises’ wholesale distribution of goods to unrelated parties.

Amount B does not apply to wholesale distributors, including buy/sell, commissionaires and sales agents which:

• Own unique and valuable intangibles;

• Assume economically significant risks;

• Perform distribution of  commodities or services or digital goods;

• Have distribution of retail sales above the de minimis threshold (i.e. retail distribution revenue of more than 20% of the total net revenue);

• Perform non-distribution activities such as manufacturing, R&D and procurement (unless those non-distribution activities can be reliably segmented and separately priced);

• Have annual operating expenses to sales ratio lower than 3% or greater than 20% to 30%.

The target Return on Sales (i.e. the value between 1.5% and 5%), for  in-scope activities that qualify for Amount B is determined with the use of a pricing matrix. The pricing matrix set out in the OECD report takes into account the distributor's industry, operating expense intensity and operating asset intensity.

The Amount B guidance is incorporated in the OECD Transfer Pricing Guidelines and can be applied for in-scope transactions for fiscal years commencing on or after 1 January 2025. Although it is a soft law, these guidelines may have direct effect in many countries’ local law (and tax treaties), meaning that no local legislative process is required prior to implementation.

To date the Maltese tax authorities have not mandated the use of the simplified and streamlined approach or issued any guidance in this respect.

Amount B could also be used as a resolution tool in MAP cases under certain conditions.