OECD Publishes Guidance on Streamlined Application of Arm’s Length Principle to Baseline Distribution Activities

The OECD on February 19 released a report on Amount B of Pillar One that introduces a simplified and streamlined application of the arm’s length principle for baseline distribution activities. This guidance has been incorporated into the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 as an annex to Chapter IV. For prior coverage, see OECD Issues Second Consultation on Pillar One Amount B.

The simplified and streamlined approach for the application of the arm’s length principle to baseline marketing and distribution activities is meant to enhance tax certainty and relieve taxpayers’ and tax authorities’ compliance burdens, with a particular focus on tax authorities in low-capacity jurisdictions with limited resources. 

Jurisdictions will have the option to implement the simplified and streamlined approach, formerly referred to as Amount B, in two different ways, or not at all. A jurisdiction can permit in-scope distributors to elect to apply the approach or it can require both in-scope taxpayers resident in the jurisdiction and the tax administration to apply it prescriptively. Jurisdictions can choose to apply the simplified and streamlined approach for tax years beginning on or after January 1, 2025.

As is the case with other elective approaches in the OECD transfer pricing guidelines, an outcome determined under the simplified and streamlined approach is non-binding on the counterparty jurisdiction. However, the members of the OECD’s Inclusive Framework on Base Erosion and Profit Shifting are committed to respecting the outcome determined under the approach if applied by a low-capacity jurisdiction.

In-Scope Distributors

Qualified transactions for purposes of the simplified and streamlined approach are buy-sell marketing and distribution transactions and sales agency/commissionaire transactions for the wholesale distribution of tangible goods; services (including digital services) and the distribution of commodities or digital goods are excluded. In addition, in-scope distributors cannot assume economically significant risks or own unique and valuable intangibles. However, the simplified and streamlined approach allows in-scope distributors to perform certain non-distribution transactions if they can be separately and reliably priced under the general principles of the OECD transfer pricing guidelines. 

Determination of the Return

To determine the return for a tested party involving an in-scope transaction under the simplified and streamlined approach, a tax administration or in-scope taxpayer must rely on a pricing matrix of returns on sales published by the OECD. The pricing matrix produces a narrow range of returns on sales for a tested party based on its net operating asset intensity, operating expense intensity, and industry grouping. The pricing matrix will be updated every five years unless there is a significant change in market conditions that requires an earlier update. A return on operating expense calculation is used as a check (cap and collar) on the reasonableness of the return on sales.


Documentation continues to be important as it will substantiate the taxpayer’s application of the simplified and streamlined approach. Relevant documentation will include an explanation of the delineation of in-scope transactions through the functional analysis, written contracts or agreements covering the qualifying transaction, calculations showing the determination of the financial results attributable to the in-scope transaction, and schedules showing that financial data used in the approach ties to the annual financial statements.

BDO Insights

The OECD’s Report on Pillar One – Amount B represents the culmination of years of negotiation among the members of the Inclusive Framework. It reflects the difficulty of achieving consensus, even on the narrow issue of transfer pricing of baseline marketing and distribution functions. 

Taxpayers who were looking for a truly simplified approach to benchmarking their wholesale distribution activities may be disappointed. Multinational entities (MNEs) will still need to conduct a full functional, risk, and asset analysis of their operations. They will need to determine whether they are in scope of the new simplified and streamlined approach – which may involve the application of additional, as yet unspecified qualitative criteria - and may need to segment their financial results to isolate in-scope activities. And upon audit, this approach may need to be set aside for a traditional comparable profits method/transactional net market method analysis (if the country on the other side of the transaction has not adopted the approach). 

Documentation requirements are unchanged for taxpayers, and certainty is not guaranteed. As before, transfer pricing will remain subjective and dependent on a clear understanding and analysis of the functions, assets, and risks of each party to an MNE’s intercompany transactions.