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Executive summary
On 19 February 2024, the Organisation for Economic Co-operation and Development (OECD) published the final report on Pillar One Amount B (the Report), which is intended 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 low-capacity countries (Amount B approach).
Unlike other BEPS 2.0 measures, Pillar One Amount B is not subject to a revenue threshold and can be applicable to many multinational businesses.
The Report is incorporated into the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 (OECD TP Guidelines).
Jurisdictions can choose to apply the Amount B approach for in-scope transactions of tested parties in their jurisdictions for fiscal years starting on or after 1 January 2025.
The Report sets out which distributors and sales agents are in scope and how to price their in-scope intercompany transactions. Distribution of non-tangible goods and services and marketing, trading, or distribution of commodities are excluded from the scope of Amount B.
The Amount B approach is a three -step analysis to determine a return on sales for in-scope distributors.
The Report also contains guidance on documentation (specifically the transfer pricing local file), transitional issues, and tax certainty considerations.
Detailed discussion
Background
In October 2021, the OECD released a statement reflecting the high-level agreement of Inclusive Framework on BEPS member jurisdictions on key parameters of Pillars One and Two of the BEPS 2.0 project, together with an implementation plan.1 As described in the October 2021 statement, Amount B would simplify and streamline the application of the arm's-length principle to in-country baseline marketing and distribution activities, with a particular focus on the needs of low-capacity countries.
The OECD released a working draft on Amount B in December 2022.2 This working draft did not yet reflect consensus agreement in the Inclusive Framework and was released to obtain input from stakeholders. In July 2023, the OECD published a second consultation document, which reflected further development of Amount B with some open issues still remaining.3
Overview
Following the two consultation documents on Amount B, the OECD issued the Report, as approved by the OECD/G20 Inclusive Framework on BEPS, subject to reservations recorded by India. The Report is incorporated in the OECD TP Guidelines as an Annex to Chapter IV.
Additional work to be done
The Report identifies additional work that is being done with respect to several aspects of Amount B:
- Updated Commentary on Article 25 of the OECD Model Tax Convention (OECD MTC) that will include specific language relating to tax certainty and the elimination of double taxation to ensure that optionality is preserved in all dispute resolution mechanisms for jurisdictions that do not adopt Amount B — expected to be released shortly
- Additional optional qualitative scoping criterion that jurisdictions may choose to apply — to be concluded by the Inclusive Framework by 31 March 2024, with any additions to be incorporated into the OECD TP Guidelines
- List of low-capacity jurisdictions — to be concluded by the Inclusive Framework by 31 March 2024
- Competent authority agreements to be used in the context of bilateral tax treaty relationships where Amount B is applied by low-capacity jurisdictions to avoid double taxation, as well as to prevent double non-taxation — to be developed by the Inclusive Framework during 2024
- Framework to gather information on the practical application of the Amount B approach once it has been in operation for a period of time — to be developed by the Inclusive Framework during 2024
- Further work on the interdependence between Amount B and Amount A of Pillar One — to be undertaken by the Inclusive Framework before the signing and entry into force of the Multilateral Convention for Amount A
Implementation of Amount B
The Report indicates that the OECD will publish a list of the jurisdictions that choose to apply Amount B.
Amount B will be treated as providing an arm's-length outcome only in jurisdictions that choose to apply the approach. In jurisdictions that do not choose to apply it, Amount B will not be treated as providing an arm's-length outcome, including for the purposes of Article 9 of the OECD MTC and by extension Article 25.
The outcome determined under the Amount B approach by a jurisdiction is not binding on the counter-party jurisdiction.
Jurisdictions that choose to apply Amount B may choose to apply it by either (1) permitting tested parties resident within their jurisdiction to elect to apply the Amount B approach; or (2) by requiring the use of the Amount B approach in a prescriptive manner by their tax administration and tested parties resident in the jurisdiction.
Regardless of the manner of application, the Report states that the arm's-length outcome for out-of-scope transactions should be evaluated under the guidance included in the other sections of the OECD TP Guidelines. Moreover, the guidance should not be interpreted as providing a "floor" or a "ceiling" for returns to distribution activities in general.
The OECD notes that because Amount B is incorporated in the OECD TP Guidelines, it is possible that some jurisdictions not participating in the Inclusive Framework will be impacted by these rules.
Mechanics of Amount B
The Report describes the mechanics of the Amount B approach, addressing:
- Transactions that are in-scope
- Application of the most appropriate method principle
- Determination of the return
- Documentation
- Transitional issues
- Tax certainty and elimination of double taxation
Transactions in scope
The Report provides that the Amount B qualifying transactions are:
- Buy-sell marketing and distribution transactions where goods are purchased from associated enterprises for wholesale distribution to unrelated parties
- Sales agency and commissionaire transactions that contribute to wholesale distribution of goods to unrelated parties carried out by associated enterprises
Wholesale distribution is defined as distribution to any type of customer except end consumers. Additionally, a distributor that carries out both wholesale and retail distribution is deemed to carry out solely wholesale distribution if its net retail revenues do not exceed 20% of total net revenues, calculated based on a weighted average for the past years.
A qualifying transaction will be subject to Amount B if it satisfies the specified scoping criteria. The qualifying transaction must exhibit economically relevant characteristics such that it can be reliably priced using a one-sided transfer pricing method where the distributor, sales agent or commissionaire is the tested party. This would in essence mean that the distributor should not:
- Make any unique and valuable contributions
- Assume and control certain economically significant risks
- Use assets and assume risks in the qualifying transaction — if the distributor and its counterparties carry out functions — with such a degree of integration that their contributions cannot reliably be evaluated in isolation from each other
Further, the tested party in the qualifying transaction must not incur annual operating expenses lower than 3% or greater than an upper bound of between 20% and 30% of the tested party's annual net revenues.
The Inclusive Framework is developing additional optional qualitative scoping criteria that jurisdictions may choose to apply.
The tested party to the qualifying transaction also must not carry out non-distribution activities (such as manufacturing or research and development) unless the qualifying transaction can be adequately evaluated and priced separately from these activities.
The Amount B scope excludes transactions for the distribution of "non-tangible" goods and services and the marketing, trading, or distribution of commodities, with a specific definition of commodities provided for purposes of this exclusion.
Application of the most appropriate method principle
In evaluating the choice of transfer pricing method for in-scope transactions, it is not necessary to prove that a particular method is not suitable, nor is it necessary that all transfer pricing methods are analyzed in depth or tested in each case. Rather, the transactional net margin method (TNMM) is to be considered the most appropriate method for purposes of applying the proposed pricing methodology to qualifying transactions.
The Report indicates that there may be rare instances in which applying the Comparable Uncontrolled Prices (CUP) method using internal comparables could be more appropriate than the TNMM, notably when the necessary information is readily available to tax administrations and taxpayers. In these instances, the CUP can be used instead of the TNMM.
Determining the return
The Report provides step-by-step guidance on how to price in-scope transactions under Amount B:
- Use the pricing matrix to determine the return, taking into account the distributor's industry, operating expense intensity and operating asset intensity
- Apply the operating expense cross-check to mitigate anomalous results
- Apply an adjustment using the data availability mechanism for qualifying jurisdictions
Pricing matrix
The Report contains a pricing matrix of arm's-length results based in part on the financial information of a global dataset of companies involved in baseline marketing and distribution activities. The dataset is drawn from the results of a benchmarking study described in Appendix A of the Report.
Return on sales has been selected as the net profit indicator for pricing the in-scope transactions.
The arm's-length range derived from the pricing matrix is based on three industry groups and five categories of operating asset and operating expense intensities (providing for 15 different potential operating margins). The arm's-length results vary from 1.50% to 5.50% return on sales. If the taxpayer applying Amount B reports a return on sales that is not within 0.5% over or under the identified data point for the particular fact pattern, that return is to be adjusted accordingly.
The industry groupings refer to the below categories:
- Group 1 — perishable food, grocery, household consumables, construction materials and supplies, plumbing supplies and metal
- Group 2 — IT hardware and components, electrical components and consumables, animal feeds, agricultural supplies, alcohol and tobacco, pet foods, clothing footwear and other apparel, plastics and chemicals, lubricants, dyes, pharmaceuticals, cosmetics, health and wellbeing products, home appliances, consumer electronics, furniture, home and office supplies, printed matter, paper and packaging, jewelry, textiles, hides and furs, new and used domestic vehicles, vehicle parts and supplies, mixed products and products and components not listed in Group 1 or 3
- Group 3 — medical machinery, industrial machinery including industrial and agricultural vehicles, industrial tools, industrial components and miscellaneous supplies
The table below shows the returns on sales for distributors based on their net operating asset intensity (OAS), operating expense intensity (OES) and industry groupings:
Factor intensity |
Industry Grouping 1 |
Industry Grouping 2 |
Industry Grouping 3 |
[A] High OAS/any OES: >45%/any level |
3.50% |
5.0% |
5.50% |
[B] Med/high OAS/any OES: 30%-44.99%/any level |
3.0% |
3.75% |
4.50% |
[C] Med/low OAS/any OES: 15%-29.99%/any level |
2.5% |
3.0% |
4.5% |
[D] Low OAS/non-low OES: <15%/10% or higher |
1.75% |
2.0% |
3.0% |
[E] Low OAS/low OES: <15% OAS/<10% OES |
1.50% |
1.75% |
2.25% |
Operating expense cross-check
An operating expense cross check (cap-and-collar) is then applied as guardrails within which the primary return on sales net profit indicator is to be contained. If the Earnings Before Interest and Tax (EBIT) of the distributor, determined based on the pricing matrix, results in an operating expense to EBIT ratio that is outside of the cap and collar, the EBIT is adjusted accordingly.
The cap-and-collar rates are as follows:
Factor intensity |
Default cap rates |
Alternative cap rates for qualifying jurisdictions |
Collar rate |
High OAS [A] |
70% |
80% |
10% |
Medium OAS [B + C] |
60% |
70% |
|
Low OAS [D + E] |
40% |
45% |
Data availability mechanism for qualifying jurisdictions
In addition, the Report provides for an adjustment mechanism in cases where there is no data or insufficient data in the global dataset for a particular qualifying tested party jurisdiction.
Where a tested party is located in a qualifying jurisdiction, the adjustment will be made to the return determined under the previous steps (i.e., net risk adjustment and net operating asset intensity percentage).
Application
The financial ratios used to apply the Amount B approach are to be determined with reference to "Applicable accounting standards," which the Report defines as "any accounting standard that is permitted as a basis upon which to prepare financial statements in the jurisdiction where the tested party performing baseline distribution activities is resident, and to any other accounting standard whose use is permitted by such jurisdiction for purposes of applying the simplified and streamlined approach."
Periodic updates
The Report indicates that the analysis supporting the Amount B ranges and the operating expense cap-and-collar rates will be updated every five years (unless interim updates are considered necessary) and the financial data and other datapoints will be updated annually.
Documentation
The documentation requirements under Amount B build on the existing documentation requirements included in Chapter V of the OECD TP Guidelines (specifically the local file). The Report indicates that this should include: an explanation on the delineation of the in-scope qualifying transaction (including functional analysis), written contracts, calculations needed for application of the framework, and segmentation and reconciliation.
When the taxpayer is seeking to apply Amount B for the first time, the taxpayer should include in its local file, or in any other relevant documentation, a consent to apply Amount B for a minimum of three years, unless transactions fall out of scope during that period or there is a significant change in the taxpayer's business. The taxpayer is required to notify the tax authorities of the jurisdictions involved in the qualifying transaction of its intention to apply Amount B.
Transitional issues
The Report notes that there may be situations where some MNE Groups may undertake business restructurings to fall in or out of scope of Amount B. It reiterates that MNE Groups are free to organize their business operations as they see fit and tax administrations do not have the right to dictate to MNE Groups how to design their structure or where to locate their business operations. It further states that tax administrations, however, have the right to determine the tax consequences of the structure resulting from the reorganization and that the provisions of Chapter IX of the OECD TP Guidelines on business restructurings would apply.
The Report states that some associated enterprises may attempt to artificially reorganize their arrangements to derive tax advantages from the application of Amount B. Jurisdictions may adopt approaches to address these concerns.
The Report notes that Amount B may apply to a restructured distributor with built-in losses from prior fiscal years. The tax treatment of those losses, in particular whether they can be deductible, would depend on each jurisdiction's domestic legislation and administrative procedures.
Tax certainty and elimination of double taxation
The Report describes potential sources of double taxation and the process by which double taxation may be relieved.
Some jurisdictions may provide relief from economic double taxation through unilateral corresponding adjustments making use of provisions in their domestic laws. However, most jurisdictions would only be able to consider corresponding adjustments as part of a mutual agreement procedure (MAP) under a bilateral tax treaty. In a MAP or resulting arbitration procedure, when one or more of the jurisdictions relevant to the MAP have not elected to apply or accept Amount B, they must justify their positions on the appropriate corresponding adjustments using the remaining provisions of the OECD TP Guidelines and not the Amount B approach.
Agreements reached under Article 25 of the OECD MTC (including bilateral or multilateral Advance Pricing Agreements, as well as MAP cases) prior to the implementation of Amount B will continue to be valid with respect to qualifying transactions.
Implications
Because Amount B is not subject to a revenue threshold (in contrast to both Pillar One Amount A and Pillar Two), it is widely applicable. Companies should consider whether they have transactions that may be in scope of Amount B and evaluate the potential impact of the Amount B approach on those transactions.
It will be important for companies to monitor whether and how the jurisdictions that are relevant to their business choose to implement Amount B, including assessing whether they may have in-scope transactions that involve a jurisdiction that implements Amount B and a jurisdiction that does not.
The dates of implementation by relevant jurisdictions should be monitored as this could be relevant to accounting for the tax impact, and consequently the effective tax rate of the group. We expect that this would become a point of discussion in statutory audits.
Contact Information
For additional information concerning this Alert, please contact:
Ernst & Young Belastingadviseurs LLP (Netherlands)
- Ronald van den Brekel
- Marlies de Ruiter
- Oana Popescu
Ernst & Young Limited (New Zealand)
- Matt Andrew
Ernst & Young LLP (United States)
- Barbara M. Angus
- Jose A. (Jano) Bustos
- Tracee J Fultz
- Mike McDonald
- Joana Dermendjieva
Ernst & Young LLP (United Kingdom)
- Joel Cooper
- JP Borman
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
