Pillar One - Amount B

Special considerations for baseline distribution activities

The following sections of this report are added to the OECD Transfer Pricing Guidelines as an Annex to Chapter IV.

DEFINITIONS

The following terms have the meanings set out below solely for the purposes of this guidance.

Distributor refers to wholesale distributors, sales agents, and commissionaires involved in the sale of goods. 1 Where applicable, specific references may be made to a wholesale or retail distributor, sales agent, or commissionaire.

Wholesale distribution includes distribution to any type of customer except end consumers. For the purposes of this guidance, a distributor that engages in wholesale and retail distribution is deemed to solely carry out wholesale distribution if its three-year weighted average net retail revenues do not exceed 20% of its three-year weighted average net revenues. 2

Retail distribution is distribution to end consumers, typically through physical or online stores.

Baseline distribution refers to activities performed by distributors where such distributors act as tested parties in qualifying transactions under paragraph 10 of this guidance, and where such distributors meet the scoping criteria outlined in paragraphs 13 and 14 of this guidance.

Core distribution functions are distribution functions that are typically performed by baseline distributors, depending on the business model of the distributor, i.e. whether it is a buy-sell distributor, sales agent, or commissionaire. Core distribution functions may include buying goods for resale, identification of new customers and managing customers’ relationships, certain after-sales services, implementing promotional advertising or marketing activities, warehousing goods, processing orders or performing logistics, invoicing and collection. Core distribution functions may vary in intensity and complexity and specifically exclude non-distribution activities that may render a distributor out of scope of the simplified and streamlined approach (see Section 3.3.4 of this guidance).

Non-distribution activities are economic activities that are distinct from wholesale distribution, including, for example, manufacturing, research and development, procurement or financing that are non-incidental to a qualifying transaction. Note that, strictly for the purposes of applying scoping criteria14.b, non-distribution activities include retail distribution above the de minimis threshold noted in the definition of wholesale distribution (in cases where this threshold is exceeded all retail distribution is treated as a non-distribution activity).

Global dataset refers to the set of companies that has been derived from a search of a commercial database containing global company financial data, without application of any geographic filter, and which in part forms the basis for the approximation of arm’s length results under the simplified and streamlined approach referenced in Section 5.

Applicable accounting standards refers to any accounting standard that is permitted as a basis upon which to prepare financial statements in the jurisdiction where the tested party performing baseline distribution activities is resident, and to any other accounting standard whose use is permitted by such jurisdiction for purposes of applying the simplified and streamlined approach referenced in Section 5.

Net revenues refers to total sales revenue excluding any sales returns, allowances, and discounts, calculated in accordance with applicable accounting standards.

Earnings before interest and taxes (EBIT) refers to financial account profit before income taxes and finance income/expense. Finance income/expense includes, but it is not limited to, interest income, interest expense, and gains & losses on investments.3 As a general matter, EBIT should not include any exceptional items that are unrelated to recurring business operations, which should be quantified in accordance with applicable accounting standards.

Return on sales refers to the ratio of EBIT to net revenues, expressed as a percentage, and calculated in accordance with applicable accounting standards.

Net operating assets refers to the tangible and intangible fixed assets plus working capital calculated on an average basis4 for a relevant fiscal year in accordance with applicable accounting standards. Tangible fixed assets include property, plant, and equipment net of accumulated depreciation, plus land plus net capital leases. Intangible fixed assets include all intangible fixed assets, net of accumulated amortisation, but excluding goodwill. Working capital is the sum of stock plus debtors less creditors. 5

Operating expenses refers to total costs excluding cost of goods sold, pass-through costs appropriately excluded under the accurate delineation of the transaction6 and costs related to financing, investment activities or income taxes, calculated in accordance with applicable accounting standards. Moreover, operating expenses should not include any exceptional items that are unrelated to recurring business operations, which should be quantified in accordance with applicable accounting standards.

Net operating asset intensity (OAS) refers to the ratio of net operating assets to net revenue, expressed as a percentage. 7

Operating expense intensity (OES) refers to the ratio of operating expenses to net revenue, expressed as a percentage. 8

Industry grouping refers to the categorisation of specific industries and industry sectors in which in-scope distributors operate into three pre-defined groupings based on the observed relationships between specific industries / products and the profitability attributed to baseline distribution of those products. The categories of goods falling into each of the three industry groups are:

• Group 1 – perishable foods, grocery, household consumables, construction materials and supplies, plumbing supplies and metal.

• Group 2 – IT hardware and components, electrical components and consumables, animal feeds, agricultural supplies, alcohol and tobacco, pet foods, clothing footwear and other apparel, plastics and chemicals, lubricants, dyes, pharmaceuticals, cosmetics, health and wellbeing products, home appliances, consumer electronics, furniture, home and office supplies, printed matter, paper and packaging, jewellery, textiles hides and furs, new and used domestic vehicles, vehicle parts and supplies, mixed products and products and components not listed in group 1 or 3.

• Group 3 – medical machinery, industrial machinery including industrial and agricultural vehicles, industrial tools, industrial components miscellaneous supplies.

Factor intensity classification refers to the segmentation of different levels of net operating asset and operating expense intensity into five pre-defined classifications based on the observed relationships between asset and expense intensity and the profitability attributed to baseline distribution. The factor intensity classifications are defined in the pricing matrix in table 5.1 of Section 5.

Qualifying jurisdiction(s) within the meaning of Section 5.3 refers to jurisdictions where the data availability mechanism referenced in Section 5.3 applies for the purpose of determining adjusted returns for tested parties located in those aforementioned jurisdictions. The qualifying criteria will be incorporated into this guidance in a subsequent update. The list of qualifying jurisdictions for Section 5.3 purposes will be fixed prospectively based on those qualifying criteria, published and updated every 5 years on the OECD website.

Sovereign credit rating refers to the publicly available long term sovereign credit ratings periodically assigned to or re-affirmed for a jurisdiction by a recognised independent credit rating agency and relevant to Section 5.3 guidance.

Recognised independent credit rating agency(ies) refers to the following independent credit rating agencies: Moody’s Investors Service, S&P Global Ratings, and Fitch Ratings and relevant to Section 5.3 guidance.

Equivalent return on operating expense refers to the return on sales of a tested party calculated in accordance with Section 5.1 and converted into a corresponding ratio of EBIT to operating expenses for the purpose of applying the operating expense cross-check in Section 5.2.

Operating expense cap refers to the maximum equivalent return on operating expense, specified in table 5.2, that the simplified and streamlined approach will produce for a given tested party in accordance with Section 5.2.

Operating expense collar refers to the minimum equivalent return on operating expense, specified in table 5.2, that the simplified and streamlined approach will produce for a given tested party in accordance with Section 5.2.

Qualifying jurisdiction(s) within the meaning of Section 5.2 refers to jurisdictions where alternative cap rates apply for the purpose of determining the operating expense cap-and-collar range for tested parties located in those aforementioned jurisdictions. The qualifying criteria will be incorporated into this guidance in a subsequent update. The list of qualifying jurisdictions for Section 5.2 purposes will be fixed prospectively based on those qualifying criteria, published and updated every 5 years on the OECD website.

References to the “Remainder of these Guidelines” or “these Guidelines” refer to the entirety of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, except for the guidance contained in this Annex.

References to “this guidance” refers to the entirety of this Annex, and not to the Remainder of these Guidelines.

Notes

← 1.  The scope of this guidance is limited to wholesale distribution of tangible goods and does not include services (including digital services).

← 2.  This threshold should be calculated on a three-year weighted average basis, for each year, for the purposes of determining whether the threshold is breached. For example, for a transaction in fiscal year x, the three-year weighted average threshold would be derived by (A) taking the sum of the annual retail revenue for years x-3, x-2, and x-1, then (B) taking the sum of the annual net revenues over the same period, and then dividing (A) by (B) to derive the appropriate percentage. Where the qualifying transaction has been in place for two years, a two-year weighted average ratio should be used, and where the qualifying transaction has been in place for only one year the ratio should be calculated based on the financial results for that year.

← 3.  See paragraph 2.88 of these Guidelines for specific consideration which might be given to foreign exchange risks and costs associated with such foreign exchange risks and how that might be treated when calculating net revenues, cost of goods sold, and any other line items and ratios applicable in the simplified and streamlined approach. It is possible that, if the exposure is economically significant, there may be circumstances where a party assuming such risks would not meet the scoping criteria described in Section 3.2.

← 4.  Net operating assets calculated on an average basis means taking the sum of the net operating assets for a relevant fiscal year (i.e. the closing balance) plus the net operating assets for the preceding fiscal year (i.e. the opening balance) and dividing by two.

← 5.  Creditors includes third party and intercompany payable balances. For the purpose of determining creditors of the tested party and mitigating the risk of distortive credit terms, an accounts payable days guardrail of 90 days applies. See footnote 29 in Section 5 for further practical guidance.

← 6.  The relevance and treatment of pass-through costs is discussed further in footnote 24 of Section 3 of this guidance.

← 7.  This ratio should be calculated on a three-year weighted average basis, for each fiscal year, for the purposes of determining the factor intensity classification. For example, for a tested party in fiscal year x, the three-year weighted average ratio would be derived by (A) taking the sum of the annual net operating assets for years x-3, x-2, and x-1, then (B) taking the sum of the annual total net revenue over the same period, and then dividing (A) by (B) to derive the appropriate percentage. Where the qualifying transaction has been in place for two years, a two-year weighted average ratio should be used, and where the qualifying transaction has been in place for only one year the ratio should be calculated based on the financial results for that year.

← 8.  This ratio should be calculated on a three-year weighted average basis, for each fiscal year, for the purposes of determining whether the scoping threshold is breached and for determining the factor intensity classification. For example, for a tested party in fiscal year x, the three-year weighted average threshold would be derived by (A) taking the sum of the annual operating expenses for years x-3, x-2, and x-1, then (B) taking the sum of the annual total net revenue over the same period, and then dividing (A) by (B) to derive the appropriate percentage. Where the qualifying transaction has been in place for two years, a two-year weighted average ratio should be used, and where the qualifying transaction has been in place for only one year the ratio should be calculated based on the financial results for that year.