New guidelines on Amount B - Pillar One from the OECD

The new report provides detailed guidelines on the implementation of Amount B, which is part of Pillar One. The guidelines have been incorporated into the OECD Transfer Pricing Guidelines and constitute a new Annex to Chapter IV of the OECD Transfer Pricing Guidelines.

Amount B aims to create a simplified and templated framework for pricing of intra-group sales of goods to independent companies via low-risk distributors.

It appears from the report that it is up to each individual jurisdiction to decide if they want to implement the regulatory framework, and the report presents two alternative solutions for this implementation: 1. as a possible safe harbour that companies can opt to apply, or 2. as a mandatory rule. However, the guidelines on Amount B are not applicable for companies until the tax years beginning on or after 1 January 2025. The guidelines are not binding for jurisdictions other than those having opted for an implementation of Amount B.

The work on Pillar One within the OECD continues, and next focus will be on the interaction between Amount A and Amount B. The intention is to make changes to the Multilateral Convention.

The purpose of Amount B is to simplify transfer pricing for baseline marketing and distribution activities. With the introduction of Amount B and its predetermined compensation levels, the hope is to have a more equal and simple application of the arm's length principle for low-risk distributors for the benefit of both taxpayers and tax authorities, not least in less developed countries.

The benefit will be relatively limited, though, as the guidelines will not be binding for jurisdictions other than those who opted for an implementation of Amount B. This means that a group which (as a mandatory rule or as safe harbour) applies the profit margin stipulated in Amount B from a transaction between a group company operating in a country having implemented the regulatory framework and a group company in a country not having implemented the regulatory framework, in addition to the analysis on Amount B's applicability, must also perform a traditional analysis according to the arm's length principle.

Unlike Amount A, Amount B is not limited to only large groups, where there is no without size limitation. The regulatory framework applies to multinationals using intra-group low-risk distributors for sale of goods to independent companies. The definition used is "baseline marketing and distribution", and although there are many similarities between what falls within this concept and what is normally classified as low-risk distributors within transfer pricing, the definitions do not correspond completely. In order to determine whether Amount B is applicable, a separate analysis should be performed (see below). In addition, Amount B only covers companies engaged in wholesale distribution, although small volumes of consumer sales (less than 20%) are accepted within the definition. Both consumer and industrial products are covered (e.g. cars, electronics, textiles, tools, and pharmaceuticals). Also distribution carried out by sales agents and commissioners is covered. The report is clear with regard to transactions that only those relating to material goods are covered by Amount B, whereby services, raw materials (commodities), and digital goods are not covered.

To determine whether Amount B is applicable to a certain transaction, so-called "scoping criteria" are applied. All four below-mentioned criteria must be fulfilled in order for Amount B to apply:

1. The Net Margin Method (TNMM) is the correct pricing method, and the distributor is the least complex party ("tested party");

2. "Tested party" must not have a ratio of OPEX/Sales that falls below 3% or exceeds 20-30% (the exact level within the 20-30% range shall be determined by the respective jurisdiction);

3. The transaction does not involve sale of intangibles goods, services, or commodities; and

4. The distributor performs no additional functions that cannot be classified as "baseline marketing and distribution" (e.g. manufacturing) and cannot with certainty be distinguished and priced separately.

Companies may also be exempted from applying Amount B if it proves more correct to apply an internal market pricing method (CUP) for the transaction.

Once established that the transaction is covered by Amount B, it should be determined at which level the distributor should be compensated. The compensation is defined as operating margin in relation to sales (ROS) and can be determined by using a price matrix. The price matrix contains three industry categories and five levels based on the size of operating assets (Operating Assets) and operating expenses (Operating Expenses) in relation to sales. The generated price matrix, which contains 15 different outcomes, shows a standardised profit margin for the respective company category. These margins vary from 1.5% for the lowest to 5.5% for the highest. So the interquartile range is not applied, which is common in transfer pricing contexts, but instead +/- 0.5% should be accepted for each level.

It is worth noting that this method does not take into consideration whether or not a distributor purchases and sells goods in its own name or whether the company acts as an agent or commission agent.

OECD also allows companies to adjust the defined ROS result, taking into account the ratio between EBIT and operating costs and then specifying a minimum of 10% and a maximum ceiling depending on the circumstances, such as industry categories (minimum ceiling 40%; maximum ceiling 80%).

The purpose of Amount B primarily simplification. It is evident that when a taxpayer is subject to Amount B, and both involved jurisdictions have embraced its provisions, the process tends to become more streamlined and it would then be a simplification.

Nevertheless, the decision regarding the adoption of Amount B rests with individual nations, whether it should be enforced as a mandatory protocol or as an optional "safe harbor" mechanism. Consequently, the actual efficacy of Amount B in achieving simplification remains somewhat ambiguous.

Unfortunately, there exists a potential for Amount B to usher in a new paradigm where two distinct regulatory frameworks must coexist: the conventional approach alongside Amount B. Such a scenario may heighten uncertainty, particularly in transactions involving parties from jurisdictions with divergent implementations of Amount B.

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