Agree the B
The OECD has published a Model Competent Authority Agreement for countries to implement ‘Amount B’ of BEPS 2.0
OECD publishes a Model Competent Authority Agreement for countries to implement ‘Amount B'
On 26 September 2024, the OECD/G20 Inclusive Framework on BEPS (IF) published a Model Competent Authority Agreement (MCAA) on the application of ‘Amount B’.
Amount B is the OECD’s recommended simplified and streamlined approach to transfer pricing for ‘baseline’ marketing and distribution activities. It is intended to reduce transfer pricing disputes and compliance costs for businesses and tax authorities and has been designed with a specific focus on the needs of low-capacity jurisdictions. These were not originally defined, but were broadly understood to include countries whose tax authorities had limited experience in international tax administration and/or for which local market comparable data is difficult to obtain. As a result of consensus building negotiations over the first half of 2024, agreement was reached on a political commitment by IF members to respect Amount B outcomes when applied by a broader set of more than 60 ‘Covered Jurisdictions’ identified by reference to World Bank low and middle-income country classifications (without regard to tax authority capacity). Certain OECD and/or G20 countries that expressed willingness to apply Amount B (including Brazil, Mexico and South Africa) are also included as Covered Jurisdictions.
The approach adopted by Amount B involves a matrix-based pricing framework to determine the returns for in-scope activities without the need for bespoke benchmarking against comparable independent enterprises. The OECD has specified that Amount B can only be applied to accounting periods beginning on or after 1 January 2025 but whether or not to implement, and if so the timing, are matters for individual jurisdictions to decide.
Entering into a Competent Authority (CA) agreement is also optional, but the MCAA can be used to implement the above political commitment where there is a tax treaty in place between two jurisdictions. In addition, the MCAA may be customised via bilateral negotiations in particular cases, and it provides a mechanism for the Contracting States to agree amendments from time to time. Alternatively, domestic law measures could be enacted to implement the political commitment and gaps in treaty networks may mean that even where CA agreements are concluded they will need to be supplemented by domestic law provisions. Other than by agreement, it is not clear whether a non-implementing country would be required to respect implementation by a counterparty country that is not a Covered Jurisdiction. Hence the model agreement can also be used by IF members to definitively extend the political commitment to jurisdictions not included in the list of Covered Jurisdictions.
The usual treaty-based Mutual Agreement Procedure (MAP) remains available if necessary. The preamble explains that “Where a qualifying transaction that is in scope… is the subject of a mutual agreement procedure case presented to the Competent Authorities pursuant to [the MAP article of the relevant double taxation agreement (DTA)], the Competent Authorities will intend to resolve such case by applying the simplified and streamlined approach”. Unilateral relief is encouraged. The MCAA does not specify the next steps if the CAs cannot agree, leaving this to the provisions of the existing DTA.
A notable aspect of the MCAA is that it includes a notification requirement where a competent authority has knowledge of a downward adjustment made to the profits of an enterprise in relation to a transaction in-scope of Amount B (whether under Amount B or the remainder of the OECD Guidelines). The relevant competent authority must notify the counterparty jurisdiction on a timely basis to prevent potential double non-taxation. In practice making downward tax return adjustments that reduce the taxable profits of a distribution entity is problematic as most countries’ domestic transfer pricing rules operate as a ‘one-way street’ so ensuring adjustments are booked through the accounts at year-end is likely to continue to be important.
The MCAA includes provision for Contracting States to fix an upper bound for the operating expenses to net revenues scoping criterion. The February 2024 OECD Report on Amount B left this to be determined by jurisdictions within a 20 percent to 30 percent range and the obvious potential for asymmetry was widely identified by commentators. Agreeing a bound between States relieves the danger of asymmetric treatment of any one transaction. Although countries could still agree different maxima with different counterparties (so that transactions of the same type but with different counterparties could therefore be either in or out of scope based on the counterparty’s jurisdiction), so a fixed limit would seem preferable, this is a welcome improvement.
The publication of the MCAA demonstrates that the OECD continues to develop Amount B and some countries have publicly stated their intention to adopt it. Others may well be seriously considering adopting, but waiting for further developments on ‘Amount A’, the reallocation to market jurisdictions of taxing rights over a portion of the largest multinationals’ profits. The two Amounts are not formally intertwined, but some countries may see them as such. Businesses should continue to familiarise themselves with the simplified and streamlined approach and consider how this may impact returns for baseline marketing and distribution activities and their approach to managing transfer pricing controversy.
