1. Background

Potential transfer pricing disputes related to BMDA may result in challenges for tax administrations and compliance burdens for taxpayers. The S&S Approach – formerly known as Amount B – is aimed at approximating an arm's length outcome for in-scope BMDA to enhance compliance and efficiently resolve disputes. It is incorporated as an Annex to Chapter IV of the TPG to be specially applied to BMDA. The S&S Approach is based on the TPG and its principles should not be considered a revision or interpretation tool for other transactions.

2. Overview

The Report consists of the following key elements:

  • The S&S Approach is aimed at approximating an arm's length outcome for in-scope BMDA.
  • If jurisdictions choose to adopt the S&S Approach, they can (i) authorize tested parties to apply the S&S Approach, or (ii) require the use of the S&S Approach as mandatory for in-scope BMDA.
  • To be eligible for the S&S Approach, qualifying transactions must meet the scoping criteria.
  • The transactional net margin method (TNMM) RoS is – in principle – chosen as the most appropriate method and net profit indicator.
  • The arm’s length remuneration for BMDA of a taxpayer under the S&S Approach can be determined through a pricing matrix by assessing the (i) net operating asset intensity, (ii) operating expense intensity, and (iii) industry group.
  • Taxpayers should include the relevant information to assess the application of the S&S Approach in the local file or any other relevant documentation. When a taxpayer wants to apply the S&S Approach for the first time, it should include its consent to apply the approach for a minimum of 3 years in such documentation.
  • Specific considerations on mutual agreement procedures (MAPs) concerning the application of the S&S Approach have been included in the Report covering situations (i) where one jurisdiction applies the S&S Approach and the other does not, and (ii) where there is a dispute on the application of the S&S Approach between jurisdictions. Bilateral or multilateral advance pricing arrangements (APAs) and MAPs obtained prior to the implementation of the S&S Approach would continue to be valid in relation to covered qualifying transactions.

3. What can taxpayers do?

Taxpayers can assess whether their activities are in scope of the application of the S&S Approach and whether their returns for these activities would align with the pricing matrix. The S&S approach is expected to simplify the pricing of certain distribution activities, but still requires a functional analysis and assessment of the various metrics.

4. Entry into force

Jurisdictions can choose to apply the S&S Approach for fiscal years beginning on or after 1 January 2025. India seems to be the only jurisdiction that has made various reservations to the Report and that various aspects should be further defined and designed.

5. Further details on the key elements of the Report

We will keep you informed about further developments. Should you have any questions or need assistance in assessing the impact of the Report, please contact a member of our Transfer Pricing team or your trusted Loyens & Loeff adviser.