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Bill Morgan, a financial economist at the US Treasury Department, told a panel at an International Fiscal Association’s international tax conference on 12 September 2023, that Treasury would prefer the adoption of Alternative A for the transfer pricing scoping criteria in Amount B.1
“The whole idea here is that Amount B is a simplification and we don’t think that can be achieved by introducing new concepts,” Morgan said, according to a Daily Tax Report article.
Amount B provides for fixed returns for in-scope in-country baseline marketing and distribution activities. While de minimis retail sales are allowed, the primary focus of Amount B is on the wholesale distribution of goods, including commissionaires and sales agents. Further, the scoping framework explicitly excludes the performance of services and distribution of commodities from scope.
Overview
Alternative A was proposed in a recent Consultation Document that was released among a series of technical documents by the Organisation for Economic Co-operation and Development (OECD) in July 2023 (see Tax Alert, OECD releases public Consultation Document on Pillar One Amount B on baseline distribution, dated 26 July 2023). The Consultation Document includes two alternatives in the scoping criteria, Alternative A and Alternative B, which reflect the different positions of jurisdictions participating in the work on Pillars One and Two through the Inclusive Framework.
The key differentiator between the two alternatives is whether an additional qualitative scoping criterion is required. Alternative A includes no additional qualitative scoping exclusions. Under Alternative B, the scope of Amount B would only include distributors that fit within a definition of "baseline" distributor and that do not make "non-baseline contributions" that cannot be reliably priced under the proposed pricing method.
The jurisdictions supporting Alternative A believe that the additional criteria are not needed to achieve arm's-length pricing, would make Amount B far less administrable and certain, and would have the practical effect of making Amount B a "floor" on all controlled distributor returns.
The jurisdictions supporting Alternative B believe that Amount B would not reliably produce outcomes aligned with the arm’s-length principle and would result in opportunities for base erosion and profit shifting, absent the additional criterion.
According to the Daily Tax Report article, Morgan expressed his thoughts on the comment submissions received on the Consultation Document, noting that they generally favored Alternative A. These submissions expressed enthusiasm for the potential of Amount B to streamline transfer pricing and offer greater certainty. This enthusiasm and support, he added, comes with the caveat of Amount B potentially being a safe harbor provision.
Implications
The approach that is ultimately chosen will significantly affect the impact of Amount B. Moreover, the incorporation of Amount B into the OECD Transfer Pricing Guidelines could result in different interpretations by different jurisdictions.
Given that Amount B is not subject to a global revenue threshold, it has broad applicability. Businesses should assess the potential implications of Amount B for transactions falling within the scope and evaluate its impact on those transactions. It is also crucial to remain vigilant and monitor the progress of both Pillar One and Pillar Two in the upcoming months.
For additional information with respect to this Alert, please contact the following:
National Tax Department, International Tax and Transaction Services, Transfer Pricing
- Ryan J. Kelly, Americas ITTS Tax Controversy Leader
- Hiro Furuya
- Ameet Kapoor
- Carlos M. Mallo
- Marla McClure
- Donna McComber
- Mike McDonald
- Tom Ralph
- Craig Sharon
- Kent Stackhouse
- Heather Gorman
- Giulia Di Stefano
- Carolina Figueroa
- Mitch Gibson
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, 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.
