Pillar One - Amount B: To B or not to B

16^th may 2024

The OECD recently issued a report on Amount B under Pillar One, which is part of the ongoing work to address the tax challenges arising from the digitalization of the economy.  The report provides a “simplified” approach that jurisdictions can adopt, either as a taxpayer safe harbour or as a mandatory rule, to in-scope wholesale distributors, sales agents or commissionaires for fiscal years starting on or after 1 January 2025.

Amount B aims to simplify the application of the arm’s length principle to the wholesale distribution of tangible goods, including sales agents and commissionaires. The distribution of digital goods, commodities or services (including financing services) are excluded.  There are no de minimis thresholds associated with the application of Amount B, so the approach could be applied by all entities involved in these transactions. The report provides a standardized pricing matrix that outlines the range of return on sales ratios that would be considered to be at arm’s length. This is determined by reference to net operating asset intensities (the ratio of net operating assets to net revenue) and operating expense intensites (the ratio of operating expenses to net revenue). 

The arm’s length results are categorized by industry. The pricing mechanism also includes a return on operating expenses cross-check (by calculating a ratio of EBIT to operating expenses) and an adjustment to be performed for jurisdictions with a sovereign credit rating of BBB- or lower. The benchmarking analysis underlying the pricing matrix will be updated every five years, unless there is a significant change in market conditions that warrants an interim update. Finally, the report requires taxpayers seeking to apply Amount B to consent to use this approach for three years.

Although Amount B aims to simplify compliance with the arm’s length principle, it doesn’t necessarily achieve this objective in its current form:

• First, the report excludes wholesale distributors who own unique and valuable intangibles or who assume certain economically significant risks. Groups with a combination of centrally and locally owned brands, or those in operating in industries that require local distributors to also own certain intangibles, such as intellectual property or regulatory licenses may require particular attention.
• Another potential exclusion applies when a company bundles the provision of goods and services, for instance where a distributor provides consumer financing in addition to the product sold. This would require a clear delineation of functions, which would be difficult to untangle when products and services are bundled, as is the case for many industrial groups.
• With respect to the pricing matrix itself, the net operating assets of the distributing entities play a significant role in determining the relevant arm’s length price. Thus, taxpayers should evaluate their level of net operating assets, as this can quickly push up the distribution returns an entity would expect to earn under Amount B. Moreover, such an emphasis on operating assets might potentially reduce the extent to which multinationals can set standardized returns across geographic regions.
• From a documentation perspective, the report makes no meaningful attempt to simplify the existing documentation requirements. Taxpayers will still need to describe the qualifying transactions and provide any contractual arrangements concluded between the parties, as well as the relevant financial data to test the transaction.
• Furthermore, the fact that Amount B may not be adopted by all jurisdictions, or may be applied inconsistently as either a mandatory or a safe harbor, could lead to situations where taxpayers are required to prepare a benchmarking analysis for one jurisdiction and apply Amount B in another. In short, there is a risk that Amount B makes transfer pricing more complex.
• Various important open-ended issues still remain to be dealt with, as it relates to Amount B.  The OECD has committed to furthering its work in this regard, with updated guidance forthcoming.

Jurisdictions will have the option to apply Amount B from 2025. This leaves companies with limited time to assess its impact and adjust their transfer pricing policies, so many are starting to consider the potential implications.

Here are 5 actions companies may consider:

• Model the effect for 5 – 10 pilot jurisdictions. The best way to assess the effect of Amount B is to pick some pilot jurisdictions that are more likely to implement Amount B, where the effect on your organisation would be greatest, and run the numbers.
• Compare existing transfer pricing policies for marketing and distribution activities. Another simple step would be to review your current transfer pricing policies for marketing and distribution activities against the Amount B pricing matrix. If your returns are broadly in line with the matrix the risks associated with Amount B are lower.,
• Determine the net operating assets of distribution entities. Net operating assets are typically not taken into account when setting the returns for distribution activities. If distribution entities have significant net operating assets this can quickly push up the distribution returns an entity would expect to earn under Amount B, so this is an issue groups may want to look at.
• Evaluate current approach to segmentation. If an entity performs distribution and non-distribution activities, Amount B can only be applied when the activities can be reliably segmented. Groups may want to revisit their current approaches to segmentation in light of this guidance.
• Revisit existing transfer pricing documentation and internal CUPs. The Amount B framework still requires robust documentation to demonstrate that a one-sided method can be applied and that no internal CUPs are available. It is always the right time to review your transfer pricing documentation.