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.
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
- 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: