How is Ireland implementing Pillar One Amount B in the Finance Act 2024

Below is an outline of the three-step process to determine where in the Pricing Matrix a distributor should land.

Fig. 1: Steps in determining position in Pricing Matrix.

Step 1 is to determine the distributor’s industry grouping – that is, this step determines which one of the three columns in the Pricing Matrix is the relevant column. Below are the categories of goods falling into each of the three industry groups.

Table 2: Industry groups by categories of goods.

Step 2 is to determine the distributor’s relevant factor intensity classification. This step determines which of the five rows of the Pricing Matrix is the correct row. Once the correct row of the Pricing Matrix is determined, the appropriate return is found to the right in the corresponding industry grouping column.

Operating Expense Cross-Check and Data Availability Mechanism for Qualifying Jurisdictions

The three-step process for calculating the arm’s-length return for a tested party involved in in-scope transactions is enhanced by the operating expense cross-check. This cross-check acts as a guardrail to ensure that the return on sales net profit indicator remains within a reasonable and predefined range, thereby maintaining consistency and fairness in pricing outcomes.

After determining the return on sales as per the Pricing Matrix, the operating expense cross-check is applied to validate the results. This involves calculating an equivalent return on operating expense and comparing it to the “cap-and-collar range” specified in the guidance (Table 5.2). If the return on sales results in an equivalent return on operating expense that falls outside this range, adjustments are made to bring it within the acceptable limits. This combined approach mitigates the risk of distortive effects from unusual operating expense ratios. The initial report suggested that higher alternative operating expense cap rates should be applied to certain qualifying jurisdictions.

The data availability mechanism addresses cases where there is insufficient data in the global dataset for a specific tested-party jurisdiction that qualifies as a “higher risk” country, measured by reference to the sovereign credit rating. This mechanism permits upward adjustments to the Pricing Matrix returns to ensure that the Amount B Pricing Matrix remains appropriate for such qualifying jurisdictions.

The second additional guidance document on the Amount B approach, released on 17 June 2024, provides further clarification on “qualifying jurisdictions” for both higher alternative operating expense cap (section 5.2) and data availability mechanism adjustments (section 5.3). The Statement on qualifying jurisdictions provides separate lists for sections 5.2 and 5.3. For section 5.2 qualifying jurisdictions, refer to those classified by the World Bank Group as low income, lower-middle income or upper-middle income based on the latest available “World Bank Group Country Classifications by Income Level”. For the purposes of section 5.3, “qualifying jurisdictions” are defined as those with (1) a publicly available long-term sovereign credit rating of BBB+ (or equivalent) or lower from a recognised independent credit rating agency and (2) fewer than five comparables in the global dataset.

The detailed jurisdictional list is published in June 2024 guidance document. In December 2024 the OECD published two additional documents on Amount B. These include an Amount B fact sheet that provides a high-level overview of the mechanics of Amount B and the Pricing Automation Tool. This tool is designed to compute automatically the Amount B return based on data input.

Transfer Pricing Documentation Requirement for the Simplified and Streamlined Approach

For the simplified and streamlined approach, documentation is crucial to verify that in-scope distributors’ qualifying transactions meet the scoping criteria and that the approach has been properly applied. Key documentation requirements include providing detailed explanations of the delineation of in-scope qualifying transactions, including a functional analysis and context; written contracts or agreements governing the transactions; calculations of relevant revenue, costs and assets allocated to the transactions; and allocation schedules showing how financial data ties to annual financial statements.

Companies applying the approach for the first time should include consent to apply the approach for a minimum of three years in their local file or other relevant documentation. Tax administrations retain the right to examine the taxpayer’s self-assessment on whether the scoping criteria are met and the pricing methodology has been properly applied.

Transition Issues

The OECD Amount B report (February 2024) states that MNEs can restructure to fall within or outside Amount B, but tax authorities can determine the tax consequences based on OECD guidelines, particularly Chapter IX of the Transfer Pricing Guidelines. It warns against artificial reorganisations for tax advantages and notes that jurisdictions may address these issues. Additionally, the tax treatment of prior-year losses for restructured distributors will be dealt with under local law.

Adoption of Pillar One Amount B Approach in Irish Legislation via Finance Act 2024

The Finance Act 2024 introduces “Phase I” of the Amount B rules to Irish law, effective for accounting periods beginning on or after 1 January 2025. These rules apply to transactions between MNE constituent entities based in Ireland and in “covered jurisdictions” as defined by the OECD (the most recent list was issued on 17 June 2024).

The introduction of the Amount B rules through the Finance Act 2024 represents a significant step towards aligning Ireland’s TP regulations with the OECD’s Pillar One framework. The adopted approach is in line with OECD guidance and follows the detailed processes discussed in the initial sections of this article. Below is a summary of the Amount B approach as per Irish law.

A new section, s835DA, is introduced to Part 35A of the Taxes Consolidation Act 1997 to provide for the political commitment in respect of Amount B of Pillar One. Ireland has committed to respect the Amount B outcome determined under the Phase One rules (as outlined in the “Pillar One – Amount B” report) if such an approach is applied by a covered jurisdiction with which it has a bilateral tax treaty.

A qualifying arrangement is defined as either a buy–sell marketing and distribution arrangement, where the distributor purchases goods from associated companies for wholesale distribution to independent parties, or a sales agency or commissionaire arrangement, where the sales agent or commissionaire aids in the wholesale distribution of goods to independent parties on behalf of associated companies. In these arrangements, the goods are sold by the associated company without involving other associated parties as intermediaries.

An arrangement is not a qualifying arrangement if it involves the distribution of non-tangible goods, services or commodities. Additionally, it does not qualify if the distributor, sales agent or commissionaire has annual operating expenses below 3% or above 30% of its annual net revenues.

The new s835DA also provides for updating the local file requirement to incorporate all of the additional documentation requirements as per OECD guidance in relation to the Amount B approach. The local file requirement also includes confirmation that the required conditions will be satisfied for a qualifying arrangement for a minimum period of three years, commencing from the first day of the first chargeable period to which s835DA applies.

Section 835DA(3)(3A) provides that where the relevant person is a party to a qualifying arrangement, the relevant person shall submit a notification to Revenue on the applicability of the section no later than the date on which a return for the chargeable period is required to be filed. The manner and form in which notification is to be submitted is yet to be prescribed by Revenue.

Limitations and Uncertainties in Adoption of Amount B Approach

The limited scope of Amount B, which is restricted to wholesale distributors and specifically focuses on baseline marketing and distribution activities involving tangible goods, constrains its broader applicability. For example, software companies are notably not covered under the three industry classifications, thereby limiting the wider applicability of the approach, even though in many instances the software licence is akin to a transaction in tangible property because of the limited rights granted to the licensee/purchaser. Future work in this area may expand the industry classifications to include certain transactions involving software.

Given that each jurisdiction has the choice to adopt or not to adopt the Amount B approach and those that adopt it can further decide whether to implement it as an elective or a mandatory approach for companies within their jurisdiction, there are many uncertainties regarding the adoption of the Amount B approach. Additionally, the fact that the outcome determined under the Amount B approach is not binding on counter-party jurisdictions that have not opted for the approach means that there remains the risk of TP controversy, adjustment and potential double taxation, all of which are outcomes the Amount B approach sought to remedy. For example, countries such as India and Australia have announced several reservations with the Amount B approach. Recently, on 18 December 2024, the US Department of the Treasury and Internal Revenue Service published a notice regarding their intention to issue proposed regulations allowing US taxpayers to apply the Amount B approach. Taxpayers subject to US tax with respect to in-scope transactions may elect to apply the Amount B approach for tax years beginning on or after 1 January 2025. This makes the US the first jurisdiction to adopt the approach for all in-scope inbound marketing and distribution activities. In contrast, the Netherlands recently issued a new Decree on Amount B that specifically applies to baseline distributors in a covered jurisdiction and does not apply to distributors in the Netherlands. Ireland has taken steps to adopt the Amount B approach, but only for covered jurisdictions with which it has treaty. The Irish regulation as it now stands would not recognise the Amount B applied in the US, as the US is not listed under the covered jurisdictions.

These examples demonstrate the divergent approaches in the way that jurisdictions choose to implement Amount B, which can create challenges for companies trying to comply with different sets of rules in various countries, creating the need to maintain different documentation and TP policies for jurisdictions that do and do not accept Amount B. The lack of a unified approach can lead to uncertainty, disputes and an increased compliance burden for companies.

Additionally, the added documentation requirement, such as providing confirmation and filing notifications, may result in further compliance requirements and might, to some extent, lower the anticipated benefit from the simplified approach.

Recommendation

Companies should carefully review all relevant updates on Amount B and stay informed of further developments, including, for example, the approaches adopted by different jurisdictions. Companies should also closely monitor the implementation dates of different jurisdictions so that they can effectively manage the Amount B implementation.

For companies dealing in multiple products or products that can be classified under different industry groupings, implementing Amount B may be particularly challenging. Businesses may need to prepare product-specific segmented financials, review the allocation of resources for different products, etc. Businesses must ensure that their internal systems are updated to comply with these new requirements.

Last, the Amount B approach was designed to simplify and standardise TP outcomes for routine marketing and distribution activities. For some, this outcome may be achieved, but for others, the complexities and the uncertainties around the approach may simply add to their administrative burdens.