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Italy: OECD Pillar 1 Amount B Pricing Tool to determine acceptable margins for distribution and marketing activities

published on 30 January 2025 | reading time approx. 7 minutes

Summary of the report on Amount B of Pillar 1 »

Functioning of the Pricing Tool »

Timeline and considerations »

On February 19, 2024, the OECD/G20 Inclusive Framework on BEPS (“IF”) published its report on Amount B of Pillar 1 (hereinafter the “Report” or the “Guidance”) of its Two-Pillar initiative, which focuses on setting a simplified and streamlined approach for the pricing of baseline marketing and distribution activities in an intragroup context. The content of this Report has been incorporated into the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD TPG”).

Additional guidance, mainly to clarify certain definitions used in the report, was published in June 2024 and, on January 17, 2025, the OECD published the so-called Pricing Automation Tool (hereinafter also “Pricing Tool”) designed to automatically compute the profit margins to be earned by the taxpayers that perform the in-scope baseline marketing and distribution activities qualifying under for the simplified and streamlined approach under the Guidance.

This Article provides an overview of the Pricing Tool and its main considerations for multinational groups operating in Italy.

The OECD Pillar 1 Amount B guidance provides a standardized framework on how to determine the transfer prices for certain, qualifying marketing and distribution activities (hereinafter also “qualifying transactions”).

The Report provides a matrix of return on sales margins (hereinafter “ROS”) that may be considered acceptable from an arm’s length perspective without the need to perform additional comparable searches, benchmarking or other types of analysis.

Summary of the report on Amount B of Pillar 1

The Report published by the OECD can be summarized as follows.

The Guidance begins with a Glossary section that defines key terms used throughout, such as the industry groups referenced in the pricing matrix.

Section 1 explains the issues with baseline distribution leading to excessive transfer pricing disputes and introduces the simplified and streamlined approach, which is based on existing OECD Transfer Pricing Guidelines (OECD TPG) principles.

Section 2 outlines the implementation options for jurisdictions starting January 2025. Jurisdictions can either allow resident taxpayers to use the simplified and streamlined approach as a safe harbor when the scoping criteria are met (optional approach) or permit resident distributors to apply the approach as a safe harbor and allow tax administrations to enforce it (mandatory approach).

Section 3 details the scoping criteria for using the simplified and streamlined approach. These include qualitative criteria to narrow the activities in scope, such as for instance only including transactions with economically relevant characteristics that can be reliably priced using a one-sided method or excluding certain transactions like the distribution of services, commodities, digital goods, or retail sales. Quantitative criteria are also provided, by including only activities with an operating expense intensity between a lower bound of 3 per cent and an upper bound of 20 per cent-30 per cent (to be chosen by the jurisdiction). Additionally, this section describes circumstances under which a taxpayer can perform certain non-distribution activities, like manufacturing, and still qualify.

Section 4 establishes the Transactional Net Margin Method (TNMM) as the primary pricing method to be applied for the simplified and streamlined approach. However, it allows for the use of the Comparable Uncontrolled Price (CUP) method with internal comparables when it is more appropriate in exceptional circumstances.

Section 5 provides step-by-step guidance on pricing eligible taxpayers’ distribution transactions under the simplified and streamlined approach. The pricing matrix considers the distributor’s industry, operating expenses, and operating assets levels. It includes a crosscheck mechanism to ensure pricing accuracy and a data availability mechanism for jurisdictions with insufficient data. The benchmarking analysis on which the pricing matrix is based will be updated every five years, while financial data will be reviewed annually and updated as necessary.

Section 6 details the documentation requirements for taxpayers to demonstrate their eligibility for the simplified approach.

Section 7 addresses scenarios where business restructuring causes a distributor to fall in or out of scope.

Section 8 discusses the interactions between the simplified and streamlined approach and tax certainty. If one of the jurisdictions involved has not chosen to apply the approach, the competent authorities must justify their positions based solely on the OECD TPG, excluding the simplified approach. Conversely, if there is a competent authority agreement to apply the approach, or if all jurisdictions involved have chosen to apply it, the competent authorities can rely on the approach.

On the basis of the instructions included in the Report, the OECD has developed an Excel-based Pricing Tool which shall help both taxpayers and tax administrations to calculate the appropriate ROS for a particular qualifying transaction according to the pricing matrix.

Functioning of the Pricing Tool

The Pricing Tool was developed by the OECD secretariat to automate the calculations of the ROS of the qualifying transactions. It intends to minimize administrative and compliance burdens for both taxpayers and tax administrations by automatically computing the appropriate ROS and the relevant adjustments with minimal data inputs required.

The tool is the intellectual property of the OECD, but it grants a non-exclusive, royalty-free, world-wide license to use the tool for personal or professional purposes. The OECD makes every effort to ensure, but does not guarantee, the accuracy of the tool and the embedded calculations and data.

The OECD intends to update the tool periodically where necessary (i.e. the tool will be updated when the underlying pricing matrix is updated in accordance with Section 5.4 of the Report).

To use the tool, in a first step inputs for the scoping criteria are required These are the net revenues and the operating expenses. Based on the inputs provided the tool will calculate automatically whether the quantitative scoping criterion according to paragraph 13.b. of the Report (i.e. operating expense intensity between a lower bound of 3 per cent and an upper bound between 20 per cent and 30 per cent - as chosen by the jurisdiction of the taxpayer) is met.

The OECD further clarifies that the qualitative scoping criteria according to paragraphs 13.a. and 14 of the Report (i.e. the qualifying transaction presents economically relevant characteristics to be priced using a one-sided method and the taxpayer is not involved in excluded transactions such as the distribution services, commodities, digital goods or retail sales) cannot be automatically tested with the Pricing Tool and would thus need to be assessed separately.

In a second step, if it was determined that the qualitative scoping criteria according to are met, the inputs for the pricing are required. These are among others:

Information about the jurisdiction (will be partially updated automatically based on the jurisdiction selected once jurisdictions will have implemented the new Guidance in their local law);
Financial information (in particular cost of goods sold data from a P&L perspective, and fixed assets, debtor, stock and creditors data from a balance sheet perspective);
Information about the industry grouping of the taxpayer according to Glossary section of the Report.

Based on the inputs provided the tool will calculate automatically what the appropriate ROS of the taxpayer should be considering also possible adjustments according to Sections 5.2 (i.e. operating expense cross-check) and 5.3 (i.e. data availability mechanism for qualifying jurisdictions) of the Report.

The tool also provides a separate tab outlining the automated calculations for the determination of the ROS. This shall provide the taxpayer and/or tax administrations a full step by step walkthrough of each calculation performed by the tool to allow the user to check and better understand the calculations performed based on the data it has entered.

Timeline and considerations

As outlined previously the Pricing Tool provided by the OECD is intended to further minimize the administrative burden and optimize simplification benefits of the Pillar 1 Amount B.

The OECD will hold a technical webinar on February 11, 2025 on the latest developments relating to Pillar 1 Amount B and perform a live demonstration of the Pricing Tool.

It remains to be seen how jurisdictions will react to these latest developments and whether they will be further incentivized to implement relevant local legislation.

In theory, the local jurisdictions would have been able to start to apply the new Guidance from the fiscal year beginning on January 1, 2025. To date, only the Dutch government has announced that it will implement the Guidance on an optional basis. Reactions from other jurisdictions including Italy are still outstanding.

However, in practice, tax administration may nonetheless already use the pricing matrix provided by the Report as a high-level reference point and corroborative approach for expected ROS of baseline marketing and distribution activities in tax audits.

To prepare for the likely impact of the new Guidance, multinational enterprises operating in Italy should start already now to:

Perform an analysis of their transfer pricing business model and identify entities that would fall within the scope of Amount B based on their functional profile;
Perform an analysis of the ROS of these in-scope entities and how these compare to the target ROS levels they should earn using the Pricing Tool;
Continue to monitor closely if and when jurisdictions will implement the new Guidance;
Assess and determine whether changes within the transfer pricing business model may be necessary as a result of the new Guidance.

The publication of the Pricing Tool by the OECD presents an important additional development within the transfer pricing framework of guidelines and regulations and keeps the pressure on jurisdictions to implement the new Guidance in their national legislation. Multinational enterprises that could potentially be affected by them, should thus start preparing for its implications.