OECD release of Amount B report

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 range that would be considered to be at arm’s length. This is measured by net operating asset intensity (the ratio of net operating assets to net revenue) and operating expense intensity (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, taxpayers may want to consider the following when evaluating its adoption and impact:

• 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.

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. This can be done by:

• Performing a preliminary modelling of the impact for the different jurisdictions.
• Reviewing the current transfer pricing policy for marketing and distribution activities against the Amount B pricing matrix.
• Evaluating the current segmentation approach and eventually revisit it to effectively separate in-scope and out-of-scope activities.
• Reviewing the existing transfer pricing documentation to demonstrate that a unilateral method can be applied and all the information required for the qualifying transactions can be provided.

Given the potential impact, companies are well advised to begin the process as soon as possible.