5 minute read 5 Sep 2023
Exploring the implications of Amount B

Simplifying Transfer Pricing for Routine Distributors: exploring the implications of Amount B

Shweta Pai
By Shweta Pai

EY India International Tax and Transaction Services Partner

Shweta specializes in international tax and transfer pricing. She advises companies on taxation of cross-border transactions, transfer pricing planning, documentation and controversy management.

5 minute read 5 Sep 2023
Related topics Tax Tax compliance
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The Amount B approach aims to reduce challenges tax authorities as well as taxpayers.

In brief 

  • Unlike Amount A of Pillar One and the global minimum tax rules under Pillar 2, there are no monetary thresholds (e.g., minimum global revenue) for Multinational Enterprise (MNE) Groups to be within the scope of Amount B
  • One vital area on which input is sought is whether the scope determination for Amount B should include an additional qualitative threshold
  • Application of Amount B in the India is not going to be straightforward.

The Organisation for Economic Co-operation and Development (OECD), on 17 July 2023, as part of the ongoing OECD/G20 project on addressing the tax challenges of the digitalization of the economy (the Base Erosion and Profit Shifting or BEPS 2.0 project) issued a public Consultation Document on Amount B of Pillar One (Consultation Document). Amount B provides for fixed returns for in-scope in-country baseline marketing and distribution activities. The Amount B approach is meant to be a simplified and streamlined approach to reduce administrative challenges for tax administrations and compliance burden for taxpayers.

The Consultation Document does not yet represent consensus of the Inclusive Framework on BEPS and requests stakeholder input by 1 September 2023.  Upon finalization by the year-end, Amount B will be incorporated into the OECD Transfer Pricing Guidelines (OECD TPG) by January 2024.

The Consultation Document 

Unlike Amount A of Pillar One and the global minimum tax rules under Pillar 2, there are no monetary thresholds (e.g., minimum global revenue) for Multinational Enterprise (MNE) Groups to be within the scope of Amount B. The scope of Amount B covers both buy-sell and agency arrangements including the wholesale distribution of digital goods. It excludes substantial retail sales, distribution of digital services and the trading, marketing or distribution of commodities.

One vital area on which input is sought is whether the scope determination for Amount B should include an additional qualitative threshold.  The Consultation Document proposes two alternatives (A and B) to the scoping criteria. Alternative A proposes no additional qualitative scoping exclusions. Alternative B proposes 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. 

For pricing under Amount B, the Transactional Net Margin Method (TNMM) is viewed as the most appropriate method (moderated by the Berry ratio), but tax authorities and taxpayers may under specified circumstances assert the applicability of the comparable uncontrolled price (CUP) method.

The Consultation Document contains a pricing matrix of arm's-length results based in part on financial information from a global dataset of companies involved in baseline marketing and distribution activities. Jurisdictions with local market comparables will prepare and publish their own local matrix to apply it as part of Amount B.  The arm's-length range derived from the pricing matrix is based on three industry groups and five categories of operating assets and operating expense intensities (providing for 15 different potential operating margins). The range of arm's-length results is between 1.50% and 5.50%. If the taxpayer applying Amount B reports a margin that is outside the identified range, the tax administration should adjust the result to the midpoint of the Amount B range. Agreements reached under mutual agreement procedures (MAPs) and advance pricing agreements (APAs) will be respected over Amount B.

The Consultation Document provides that the documentation requirements under Amount B will build on the existing documentation requirements included in the OECD TPG. 

India perspective 

Transfer Pricing aspects of marketing and buy-sell arrangements has been the focus of the tax authorities and the key dispute between the taxpayers and the tax authorities has generally been whether the India operations qualify as “baseline” or not.  The allegation of the Indian tax authorities is that the Indian distributors make more than baseline contributions such that the activities benefit the owner of the trademark.  The tax authorities have generally been carving out these activities and benchmarking them separately. The position of the taxpayers has been that the Indian operations are routine and therefore “baseline” and the return on sales earned by the Indian entity subsumes the remuneration, if any required for the additional activities.  This matter is currently pending review by the Supreme Court of India. 

Also, India operations of several MNE Groups are organized as “sales and marketing service support” entities which appear to be out of scope of Amount B whereas arrangements which are much wider in scope such as “sales agents” find a place. However, it is not clear as to how “sales agents” would be distinguished from marketing service providers from an India standpoint.  

Implications

It is presently unclear as to how Amount B will be implemented (eg: as a safe harbor, prescriptive etc). If implemented well, most countries and taxpayers will benefit from reduction in disputes and streamlining the transfer pricing for selling arrangements given that this will represent a consensus measure.  Irrespective of the implementation mechanism, Amount B is expected to result in reduction of compliance burden as well as provide tax certainty in a manner which may not be as cumbersome as other processes like APA and MAP.  Therefore, businesses also should evaluate the potential impact of these changes on their business models and consider adoption.

Given the lack of consensus in the scoping criteria and the two alternatives proposed (A & B), it is unclear whether the Indian tax authorities would accept the inclusion of Indian buy-sell structures within the scope of Amount B until there is clarity on the issue by the Supreme Court. Until then it appears that APAs and MAPs may provide a better alternative to seek upfront certainty on transfer pricing aspects relating to India buy-sell structures.  

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Summary

Businesses may want to consider taking the opportunity to engage with the OECD and country policymakers through the consultation process.

About this article

Shweta Pai
By Shweta Pai

EY India International Tax and Transaction Services Partner

Shweta specializes in international tax and transfer pricing. She advises companies on taxation of cross-border transactions, transfer pricing planning, documentation and controversy management.

Related topics Tax Tax compliance
Upvote