B-tween ad hoc and a hard case
The OECD is consulting on ‘Amount B’, the simplification of transfer pricing for distributors. We summarise the proposals.
The OECD is consulting on ‘Amount B’, the simplification of transfer pricing for distribut
On 8 December 2022, the OECD released a public consultation document: ‘Pillar One – Amount B’. The document builds on the commitment the OECD/G20 Inclusive Framework on BEPS (IF) reached in October 2021, to simplify and streamline the application of the arm’s length principle to in-country baseline marketing and distribution activities. Unfortunately, simplifying the rules is not always that simple. Amount B is designed to address the challenges low-capacity jurisdictions face applying transfer pricing rules and to help re-stabilise the international tax system and reduce the compliance costs businesses incur due to transfer pricing disputes. This report provides the first detailed insights into how the IF considers Amount B could operate, since the Pillar One Blueprint was published in October 2020. The public consultation on Amount B is open until 25 January 2023. While technical work on Amount B will no doubt continue, interested parties should consider submitting comments during the consultation period.
Amount B is a core component of Pillar One of the OECD’s two-pillar solution addressing the tax challenges arising from the digitalisation of the economy, but it is critically not limited to ‘digital’ or ‘online’ businesses.
The report identifies its objective as simplifying and streamlining the application of the arm’s length principle based on the guidance provided in the OECD Transfer Pricing Guidelines. This emphasises that, in contrast to Amount A of Pillar One, Amount B is not intended to allocate more taxing rights to market jurisdictions, and ties it closely within the existing accepted approach to transfer pricing. Nor is it intended that Amount B be limited to groups above a certain revenue or profitability threshold.
The report has four substantive sections:
- The first, connected with scoping, discusses how ‘baseline marketing and distribution activities’ would be defined using a set of qualitative and quantitative criteria. Essentially Amount B would apply to ‘buy-sell’ arrangements where the tested party purchases tangible goods from a related party for wholesale distribution to unrelated parties; as well as to sales agency and commissionaire arrangements. Intangible goods (such as software) and services (including financial services) are excluded from the proposals. Qualitative and quantitative criteria are proposed to identify in-scope businesses, which will generally have limited functional and risk profiles;
- The next section outlines a pricing methodology that would apply to in-scope transactions. The proposed Amount B pricing methodology aligns with current transfer pricing practices. It is proposed that a benchmarking analysis would be performed based on a set of publicly available comparable financials. The IF is exploring two alternatives with similar underlying methodologies: a pricing matrix approach setting out a range of profitability figures against two or more statistically significant quantitative measurements (for example, the ratios of asset intensity and operating expenses to sales); or a mechanical pricing tool that would use an econometric model to translate the benchmarking data that would apply based on the financial data of the tested party;
- The report recommends documentation requirements based on the OECD Chapter V Master File / Local File approach for taxpayers to demonstrate compliance with the Amount B criteria but with a number of additions; and
- A tax certainty section explains the design of a framework that will be used to avoid or, if necessary, resolve disputes arising from the application or operation of Amount B placing significant emphasis on Advanced Pricing Agreements (APAs) and Mutual Agreement Procedures (MAP) as the primary tools to achieve this.
Amount B has the potential to deliver significant benefits to both taxpayers and tax administrations, if scoped, priced and administered appropriately. The current proposal has many welcome features. However, there are a variety of areas where improvements could be made, on which we anticipate responses to the consultation will be focused.