OECD Pillar One – possible impacts on Finnish enterprises are limited
The OECD has been developing Pillar One as part of a project to reform international corporate taxation. The reform has been discussed in OECD/G20 Inclusive Framework on BEPS (IF). Pillar One includes two parts: Amount A involves partial reallocation of taxing rights, while Amount B involves transfer pricing of baseline marketing and distribution activities.
Amount A: taxing rights of market jurisdictions
Under Amount A, market jurisdictions (countries where multinational enterprises have final customers or users) would have taxing rights over a specific portion of the enterprise’s profits. Thus, in this respect, the taxing rights would no longer depend on such matters as the enterprise’s physical presence.
Implementing Amount A would require a multilateral convention (MLC), which is not yet open to signature. This means that for the time being Amount A does not require any action by Finnish enterprises.
Amount B: simplified and streamlined approach to transfer pricing of marketing and distribution activities
The purpose of Amount B is to simplify and streamline the application of the arm’s length principle to baseline marketing and distribution activities with a particular focus on the needs of jurisdictions whose tax administrations face challenges due to limited resources and unavailable comparable data. Amount B provides for a simplified and streamlined approach that can be applied to the transfer pricing of specified marketing and distribution activities as well as sales agency and commissionaire transactions.
Under the simplified and streamlined approach, the arm’s length return of transactions for a tested party performing marketing or distribution activities is determined on the basis of a pricing matrix using a specific formula. However, the transaction must be accurately delineated in accordance with its actual content on the basis of Chapter I of the OECD Transfer Pricing Guidelines.
The qualifying transactions and scoping criteria for the simplified and streamlined approach are described in detail in the guidance published by the OECD. For example, the distribution of non-tangible goods and services is outside the scope of the simplified and streamlined approach.
In February 2024, the OECD published the report (Pillar One - Amount B: Inclusive Framework on BEPS), which contains the guidance for applying the simplified and streamlined approach to the pricing of qualifying controlled transactions meeting the scoping criteria. The guidance was incorporated as an Annex to Chapter IV of the OECD Transfer Pricing Guidelines. According to the report, jurisdictions can choose to apply the simplified and streamlined approach for in-scope transactions of tested parties (sales agents and distributors) in their jurisdictions for fiscal years commencing on or after 1 January 2025.
Amount B can only be applied in jurisdictions that choose to apply it
Jurisdictions that choose to apply the simplified and streamlined approach can select whether the application of the approach is elective or obligatory. The OECD plans to publish on its website a list of the jurisdictions that apply the simplified and streamlined approach.
According to the OECD's guidance, the simplified and streamlined approach is treated as providing an arm’s length outcome in jurisdictions that have chosen to apply the approach. In jurisdictions that have not chosen to apply the simplified and streamlined approach, the approach will not, in the absence of further analysis, be treated as providing an arm’s length outcome.
The outcome determined under the simplified and streamlined approach by a jurisdiction is non-binding on the counterparty jurisdiction According to the guidance, enterprises should not rely on the simplified and streamlined approach to verify the arm’s length nature of the outcome when fulfilling their reporting obligations in jurisdictions that do not apply the simplified and streamlined approach.
According to the guidance, applying the simplified and streamlined approach in a mutual agreement procedure (MAP) requires that all jurisdictions participating in the mutual agreement procedure in question have chosen to apply the simplified and streamlined approach or that competent authorities otherwise agree on its use in MAP.
Impacts of Amount B in Finland
Finland has not chosen to apply the simplified and streamlined approach. The simplified and streamlined approach is thus not treated as providing an arm’s length outcome in Finland and an enterprise cannot verify the arm’s length nature of the pricing of its controlled transactions in Finland on the basis of the simplified and streamlined approach.
The arm’s length nature of the pricing of the transactions of a Finnish tested party is determined in Finland on the basis of the other parts of the OECD Transfer Pricing Guidelines even if the transactions of the tested party would as such be qualifying transactions and meet the scoping criteria of the simplified and streamlined approach. If an enterprise resident in Finland is a counterparty in a transaction to a foreign tested party in a jurisdiction that applies the simplified and streamlined approach, the Finnish enterprise must nevertheless verify the arm’s length nature of the transactions in Finland in accordance with the other parts of the OECD Transfer Pricing Guidelines even if the transactions would be within the scope of the simplified and streamlined approach. (However, see the commitment described below).
However, the fact that a party to a controlled transaction cannot use the simplified and streamlined approach to verify the arm’s length result in Finland does not mean that the outcome determined on the basis of the simplified and streamlined approach cannot ever be considered arm’s length in Finland. If the taxpayer verifies the arm’s length nature of the pricing in Finland with a comparability analysis based on the other parts of the OECD Transfer Pricing Guidelines, the outcome can also be accepted as arm’s length pricing in Finland.
The OECD report also contains a separate commitment under which the IF member jurisdictions have, subject to their domestic legislations and administrative practices, committed to respect the outcome determined under the simplified and streamlined approach described in the report when a covered jurisdiction has applied this approach to an in-scope transaction, and to take all reasonable steps to relieve potential double taxation that may arise from the application of this approach by a covered jurisdiction if there is a bilateral tax treaty in effect between the relevant jurisdictions. In June 2024, the OECD published a more detailed definition and criteria and a list of the covered jurisdictions based on the definition and the criteria. The Finnish Tax Administration considers the outcome determined in accordance with the simplified and streamlined approach as arm’s length even in the absence of any other analysis and information supporting the arm’s length nature of the outcome in situations where a Finnish enterprise has a qualifying transaction meeting the scoping criteria of the simplified and streamlined approach with a tested party (sales agent or distributor) resident in a covered jurisdiction that has chosen to apply the simplified and streamlined approach. Finland must also have a tax treaty in effect with the jurisdiction in question. Enterprises meeting the above-mentioned criteria and that need more detailed advice on the matter can send questions or a request for contact to siirtohinnoittelu@vero.fi or request a pre-emptive discussion.
We will keep you up to date on this website as the matter progresses.
Read more:
Pillar One Update from the Co-Chairs of the Inclusive Framework on BEPS
Do you have any questions?
If you have any questions, please contact siirtohinnoittelu@vero.fi