OECD’s pillar 1 Amount B: Will the Thai Revenue Department adopt?

Since the adoption of the original plan by the OECD/G20 over 140 countries, including Thailand, have become members of the BEPS Inclusive Framework. Membership of the Inclusive Framework requires a commitment to implement the BEPS measures consistently.

The focus of the BEPS Inclusive Framework in recent years has been BEPS Action 1 which addresses tax challenges arising from the digital economy.  BEPS Action 1 has been split into 2 pillars to address different gaps in the existing international tax rules as follows:

Pillar 1:  Addresses transfer pricing concerns and has two elements: 

•    Amount A targets the largest MNEs focusing initially on those with at least EUR 20 billion of consolidated revenue and net profits of over 10% (i.e., profits before revenue tax) and will require them to allocate a portion of their residual profits (i.e., profits exceeding 10%) and pay tax in the locations where their ultimate customers and users are located. 

•    Amount B attempts to simplify the transfer pricing for certain routine distribution and marketing activities taking place physically in a market country by providing acceptable levels of return on sales for these activities.  Unlike Amount A, there is no revenue threshold applicable in determining the applicability of Amount B.  
Pillar 2: Provides for MNEs (with global revenues of over EUR 750 million) to be subject to a global minimum tax of 15%.  

The most recent significant development in Pillar 1 has been the inclusion of guidance on the Amount B approach into the OECD Transfer Pricing Guidelines last month.  This guidance provides a new process for pricing routine marketing and distribution activities which will be treated as providing arm’s length outcomes in countries that opt to apply Amount B.

Currently, a Thai subsidiary of an MNE operating a routine distribution business in Thailand, which purchases goods from its related companies, is required to prove that the transactions with its related parties are priced based on “arm’s length” prices under the Thai transfer pricing rules.  Arm’s length prices are prices which would be expected in transactions between independent parties in the same or similar conditions.  

The Thai subsidiary would need to perform a benchmarking study involving a search for comparable independent distributors to determine an arm’s length level of profitability against which it can test its profitability level to support that its related party pricing is arm’s length.  This analysis would need to be included in transfer pricing documentation, which would be provided to the Thai Revenue Department (“TRD”) on request.

The objective of the Amount B approach is to simplify the compliance burden on a taxpayer in proving that its pricing is at arm’s length by avoiding the need to perform the benchmarking study.

Amount B will apply to (1) marketing and wholesale distribution activities where the distributor buys from related parties for sale to third parties; and (2) sales agency transactions where the entity supports the wholesale distribution of another related party to third parties. Transactions involving the distribution of non-tangible goods and services (including digital goods and services) and commodities are not covered under Amount B.

To apply the Amount B approach, the distribution business will need to demonstrate that the activities performed are routine e.g., the distributor does not contribute any unique and valuable intangibles. In addition, quantitative criteria will be applied wherein the ratio of annual operating expenses to annual net revenues of the distributor must be within a range between 3% and an upper bound of between 20% and 30%, based on a three-year average.

The OECD has produced a global dataset of independent parties which undertake routine marketing and distribution activities.  This dataset has been used to develop a global pricing matrix to approximate arm’s length returns based on return on sales. 

The return for a business will be determined based on: (1) the relevant industry grouping; and (2) “factor intensity classification”, which relies on the net operating asset intensity (“OAS”) ratio and operating expense intensity (“OES”) ratio.  Examples under the industry groupings are as follows: (1) food, construction materials and supplies (2) IT hardware, electrical components, pharmaceuticals, vehicles, and vehicle parts; and (3) medical machinery, and industrial machinery.

Countries can choose to apply Amount B to transactions for fiscal years beginning on or after 1 January 2025.

Countries are not required to implement the Amount B rules, but where they do, two options are available:

•    Permit business residents within the country to elect to apply the Amount B approach; or

•    Require businesses to apply the Amount B where the criteria are met.

We understand that the Tax Policy Division of the Thai Revenue Department is considering the Amount B rules. Whilst the aim of the rules is to simplify the transfer pricing compliance burden for routine marketing and distribution businesses and will help tax authorities which have resource constraints, the introduction of new rules inevitably adds another level of complexity to the tax laws. The Thai Revenue Department will also likely be very interested in whether the use of the pricing matrix would provide similar or better results than a Thai-only dataset, which is currently the strong preference for testing Thai entities.

Stuart Simons

Partner | Transfer Pricing – Tax & Legal

Deloitte Thailand