Amount B update: US all in (for now) but early signs of divergence
US Treasury adopts Amount B and the OECD publishes an Amount B pricing tool and fact sheets
Amount B is moving forward but its future remains unclear
As 2024 drew to a close there were some important developments on Amount B, the OECD’s recommended simplified and streamlined approach to transfer pricing for ‘baseline’ marketing and distribution activities (referred to as the SSA).
The SSA 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.
The SSA provides a matrix-based pricing framework to determine the returns for in-scope activities without the need for bespoke benchmarking against comparable independent enterprises. In a report issued in February 2024, the OECD specified that Amount B can only be applied to accounting periods beginning on or after 1 January 2025 but left decisions on implementation to individual jurisdictions.
On 18 December 2024, the US Department of the Treasury and IRS published a Notice regarding their intention to issue proposed regulations allowing US taxpayers to apply the SSA for tax years beginning on or after 1 January 2025. This is an important development, making the US the first jurisdiction to adopt the SSA for all in-scope inbound marketing and distribution activities. Further details can be found in this report produced by KPMG US.
With the Trump administration due to take control of US tax policy from 20 January 2025 there is still uncertainty as to whether the proposed regulations described in the Notice will actually be issued. The new administration could decide to revoke the Notice, move ahead with issuing the proposed regulations, or not act at all (in which case the Notice suggests taxpayers are entitled to rely on it when filing US tax returns).
The Notice invites comments from stakeholders on a number of specific implementation issues by 7 March 2025 and this provides businesses with an opportunity to express their support (or opposition) for the proposed regulations and design choices set out in the Notice, which are generally taxpayer favourable.
The US announcement was followed, on 19 December 2024, by the OECD releasing a high-level five page step by step guide to applying Amount B (referred to as fact sheets) and a pricing automation tool designed to automatically compute the Amount B return for an in-scope tested party, requiring only minimal data inputs. The pricing tool is intended to further optimise the administrative and simplification benefits of Amount B for both tax authorities and taxpayers, and should be particularly welcomed by low-capacity jurisdictions. The OECD plans to update the tool annually to reflect any changes to the pricing matrix and other datapoints relevant to application of Amount B adjustment features.
Uncertainty and risk of divergence remains
There is still considerable uncertainty surrounding the outcome of Pillar One and the interrelationship between its component parts, Amount A and Amount B. If adopted, Amount A would represent a much more radical change to the allocation of taxing rights over profits earned by the largest multinational enterprises, providing the basis for countries to withdraw or not introduce digital service taxes (DSTs). Some jurisdictions, including the UK, see full implementation of Amount B as intertwined with reaching a satisfactory outcome on Amount A and the removal of DSTs.
The US has indicated that it is willing to implement Amount B on an optional basis independently from reaching a resolution on Amount A, but is also known to prefer a mandatory implementation of Amount B across (at least some) Inclusive Framework jurisdictions and sees this as a redline issue for an agreement on Pillar One to be reached. This is problematic as other jurisdictions have expressed reservations on Amount B, most notably Australia and India.
To date the UK Government has kept its cards close to its chest and has not made any public statements on its position on Amount B. At a minimum the UK will need to take steps to honour the political commitment it has made to respect the application of Amount B by 66 low and middle income jurisdictions, ‘covered jurisdictions’ (see OECD publication on 17 June 2024), which included Argentina, Brazil, Costa Rica, Mexico and South Africa, based on those jurisdictions having expressed a willingness to apply Amount B. The UK can implement the political commitment by enacting domestic legislation. It could also enter into individual competent authority agreements with other jurisdictions (see our earlier article on this topic).
To date we have seen two other European countries take steps to implement the political commitment. The Irish Finance Act 2024 was enacted on 12 November 2024 and contains an amendment to the transfer pricing legislation (in section 45) under which Ireland will respect the Amount B approach where a covered jurisdiction (with which Ireland has a double tax treaty) applies it. This goes both ways so it can apply to inbound and outbound distribution arrangements where the covered jurisdiction applies the SSA.
The Netherlands recently issued a new Decree on Amount B. Like the recently enacted Irish Finance Bill it is an acceptance of the application of Amount B by covered jurisdictions with which the Netherlands has a double taxation treaty, rather than implementation in full. It had two interesting features. Firstly, it only applies where the baseline distribution activities are carried out in a covered jurisdiction and so does not apply to baseline distributors in the Netherlands. Secondly, it applies for permanent establishment profit attribution as well as transfer pricing purposes, which is not clearly addressed in the original report issued by the OECD on Amount B.
The divergent approaches Ireland and the Netherlands adopted have added to the concern that there will be significance divergence in the way jurisdictions choose to implement Amount B leading to greater complexity for taxpayers to navigate. There is of course the possibility that jurisdictions will agree a more harmonised approach to the implementation of the SSA in the future and that what we are seeing from Ireland and the Netherlands is just ‘phase one’ of an ongoing process.
Key takeaways
The joint US Treasury and IRS Notice is a significant step and may act as a catalyst for other jurisdictions to implement the SSA.
The SSA may be beneficial for UK multinational enterprises with in-scope US distribution arrangements as it creates an opportunity for those businesses to get greater certainty on the transfer pricing of their US marketing and distribution activities, at pricing levels that in many instances will be comparable to their current policies (and in some instances may be lower) but with no obligation to apply it. The SSA should also be considered when planning and engaging in UK-US bilateral advance pricing agreement processes, given the potential for the SSA to serve as a reference point.
The elective approach set out in the Notice is available for tax years beginning on or after 1 January 2025 and the election would be made when filing the relevant US federal income tax return.
The SSA scoping and pricing methodology may appear at first glance to be straightforward, but there are a series of potential traps for the unwary, such as data gathering, segmentation and narrow permitted ranges. We are therefore advising potentially affected businesses to carefully review whether they have the information required to apply the framework and what the framework looks like in comparison to their current transfer pricing policies. Please contact the authors or your usual KPMG contact if you would like to discuss what the framework may mean for your business.
