In the context of the end of 2024 and the arrival of 2025, it is necessary to deal with the updates of the OECD Guidelines and their implementation into national legislation in the area of transfer pricing, because only in this way it is possible to ensure a situation within the group of related parties where transfer prices will be set in accordance with the principles of arm's length and will not lead to double taxation.
In 2024, we informed you about the OECD material referred to as Pillar One - Amout B, which B is part of the OECD/G20 two-pillar solution to the tax challenges arising from the digitalisation of the economy. The OECD aims to simplify administrative procedures and reduce the associated costs of setting transfer pricing for group distributors and marketing service providers. The simplified procedure will not be available for transactions involving the supply of intangible assets or commodities.
The simplified procedure is based on the calculation of the OAS (Net operating assets intensity) and OES (Operating expense intensity) indicators, according to which companies carrying out distribution and marketing activities are divided into 5 categories of the so-called intensity factor. The company is then classified into one of three possible groups according to the sector in which the group for which the company carries out distribution and marketing activities operates. The result is a matrix according to which the market-standard ROS (return on sales%) can be determined.
The ROS shown in the matrix can be used both for setting transfer prices at the beginning of the year and for price settlements at the end of the year, without the need to compile a comparative analysis using commercial pay-for-access databases and to establish a market-based spread using a standard procedure. The OECD sees the main advantage of the simplified approach in particular in jurisdictions whose tax authorities do not have the staff capacity with the necessary skills to apply the standard procedures, which should reduce the risk of uncertainty for multinationals about the correct transfer pricing, often leading to international tax disputes and thus increased administrative costs.
The option to make use of the simplified procedures for the first time has been set for the period beginning 1 January 2025. Depending on the approach of a particular jurisdiction to the implementation of Amount B, taxpayers may therefore have the option or obligation to apply the simplified procedure as early as 2025. It is not without significance that the OECD Directives are soft law, which in practice means that, for example, in terms of procedural procedures, they do not bind the tax administrator in the same way as, for example, the Tax Code does under Czech tax legislation. The question arises, therefore, what is the current state of implementation of the simplified procedure in the national legislation of individual countries?
The Czech Republic has not yet implemented the possibility of using the simplified procedure in its methodological instructions issued by the General Financial Directorate to provide clear and uniform guidance for the application of tax laws and regulations.
Countries that consider the simplified approach effective and have issued guidance on its application include, among others, the USA.
A situation where some jurisdictions implement the simplified approach into their legislation as an obligation, while other countries do not adopt it at all, may lead to a situation where not only the intended effect of reducing administrative complexity, which would benefit both tax administrations and taxpayers, will not be achieved, but on the contrary, international tax disputes over the correct setting of transfer pricing will increase.
Autor: Lenka Lopatová
In 2024, we informed you about the OECD material referred to as Pillar One - Amout B, which B is part of the OECD/G20 two-pillar solution to the tax challenges arising from the digitalisation of the economy. The OECD aims to simplify administrative procedures and reduce the associated costs of setting transfer pricing for group distributors and marketing service providers. The simplified procedure will not be available for transactions involving the supply of intangible assets or commodities.
The simplified procedure is based on the calculation of the OAS (Net operating assets intensity) and OES (Operating expense intensity) indicators, according to which companies carrying out distribution and marketing activities are divided into 5 categories of the so-called intensity factor. The company is then classified into one of three possible groups according to the sector in which the group for which the company carries out distribution and marketing activities operates. The result is a matrix according to which the market-standard ROS (return on sales%) can be determined.
- OAS = Net operating assets / Sales revenue
- OES = Operating expenses / Sales revenue
- ROS = Earnings before interest and taxes (EBIT) / Sales revenue
The ROS shown in the matrix can be used both for setting transfer prices at the beginning of the year and for price settlements at the end of the year, without the need to compile a comparative analysis using commercial pay-for-access databases and to establish a market-based spread using a standard procedure. The OECD sees the main advantage of the simplified approach in particular in jurisdictions whose tax authorities do not have the staff capacity with the necessary skills to apply the standard procedures, which should reduce the risk of uncertainty for multinationals about the correct transfer pricing, often leading to international tax disputes and thus increased administrative costs.
The option to make use of the simplified procedures for the first time has been set for the period beginning 1 January 2025. Depending on the approach of a particular jurisdiction to the implementation of Amount B, taxpayers may therefore have the option or obligation to apply the simplified procedure as early as 2025. It is not without significance that the OECD Directives are soft law, which in practice means that, for example, in terms of procedural procedures, they do not bind the tax administrator in the same way as, for example, the Tax Code does under Czech tax legislation. The question arises, therefore, what is the current state of implementation of the simplified procedure in the national legislation of individual countries?
The Czech Republic has not yet implemented the possibility of using the simplified procedure in its methodological instructions issued by the General Financial Directorate to provide clear and uniform guidance for the application of tax laws and regulations.
Countries that consider the simplified approach effective and have issued guidance on its application include, among others, the USA.
A situation where some jurisdictions implement the simplified approach into their legislation as an obligation, while other countries do not adopt it at all, may lead to a situation where not only the intended effect of reducing administrative complexity, which would benefit both tax administrations and taxpayers, will not be achieved, but on the contrary, international tax disputes over the correct setting of transfer pricing will increase.
Autor: Lenka Lopatová