KPMG report: Where next for Amount B?

The OECD in early December 2022 published a consultation document on Amount B (read TaxNewsFlash)—its latest effort to simplify and streamline transfer pricing rules.

The goals of the Amount B initiative have received widespread support from the business community, yet that community was left underwhelmed by the consultation document, given the limited scope of Amount B and the uncertainty around both the proposed scope and the pricing methodology. Yet as both the OECD and other stakeholders have emphasized, this lack of clarity creates the opportunity for the public consultation to meaningfully impact the final design of Amount B.

With the formal consultation period almost closed, the question that many businesses are asking is, where does Amount B go from here and can I continue to shape this important discussion?

The end of the formal consultation period does not mean that policymakers are no longer interested in feedback from businesses, or that the final design has been decided. It is clear from the document that there is significant divergence in the views amongst Inclusive Framework (IF) members, who will no doubt be interested in receiving evidence that bears on the positions they are debating. Indeed, the U.S. Treasury has been explicit in its call for such evidence.

Two issues when feedback has the potential to be most impactful are long-debated transfer pricing questions: whether returns for baseline marketing and distribution activities should vary by industry or geography? But there are also others, such as the relevance of local comparables, the proposals to exclude the distribution of certain products and services from scope, and the various other exclusions, when additional evidence could help to shape the final design of Amount B.

There are always questions about what type of evidence in most impactful. Though practical experience and economic theory are no doubt important, it seems likely that the design of Amount B and associated pricing methodology will come down to a battle of benchmarking. The consultation document is clear that the OECD is planning to base its pricing methodology on a broad Orbis-based benchmarking search and that this data can be cut in different ways to show different trends. For this reason, analysis that goes beyond merely demonstrating that two variables are correlated is likely to be important.

There are some that may be skeptical about the impact that such input can have on negotiations that are, at least in part, shaped by countries’ self-interest. However, it is clear that policymakers close to those negotiations consider that objective evidence and analysis—for example, economic analysis to show that certain industries could reliably be included in the scope—is critical to getting to a better outcome. For stakeholders looking to undertake such analysis, the benchmarking search strategy in Annex A to the consultation document provides a starting point, and a way to engage with IF on data that they are relying upon to set the Amount B returns. For those interested, KPMG have run this search and would be more than happy to put in time to talk about the results.

Whether or not the IF reaches agreement on Amount B, the consultation document risks legitimizing a series of ideas and approaches to pricing returns to baseline marketing and distribution activities that could reduce, not increase, tax certainty.

Without much supporting evidence, the consultation document states that “operating margin or return on sales is considered the most appropriate net profit indicator in most instances that are within scope of Amount B.” There is a risk that such statements intensify many tax administrations’ efforts to push taxpayers away from a cost-plus approach to pricing marketing and distribution activities towards a return on sales approach. Groups (even those outside the current scoping) that use a profit level indicator that is not based on sales or that have distributors with losses may want to assess the impact this could have on their business and consider strengthening the evidence used to support their current pricing approach.

There is also a risk that Amount B could set a de facto floor to the pricing of all marketing and distribution activities, with tax administrations expecting that activities that are outside the scope should receive a higher return. This assumption is clearly incorrect and inconsistent with the arm’s length principle. There will be situations when excluded activities should be allocated higher returns, but there will equally be situations when it will be appropriate to allocate these activities an equivalent or lower return, particularly when an entity assumes upside and downside risk. It would be helpful, and appropriate, if the final design of Amount B includes an explicit statement that the scoping criteria and agreed pricing methodology have no relevance for the pricing or analysis of out-of-scope activities.

It can be tempting to read the consultation on Amount B and conclude that the hope of meaningful simplification of transfer pricing rules remains a distant dream—that countries’ views are too entrenched and their interests too divergent.

While the OECD’s continued efforts to simplify transfer pricing rules is in part a reflection of past failures, there remains a real interest among tax administrations in making transfer pricing rules simpler. Even among better-resourced administrations, there is a recognition that the current rules are a drain on scarce resources, a constraint that is felt even more sharply by low-capacity countries. If these countries are to be persuaded that the OECD and its IF remains the best organization through which to develop international tax policy, in face of a growing threat from the UN, then reaching agreement on an effective and impactful Amount B would be a good starting point.

Despite the pitfalls, there remains a realistic path for a well-designed Amount B measure that could yield significant benefits for both taxpayers and tax administrations. The chance of success is undoubtedly enhanced if businesses continue to engage with stakeholders to push the OECD and IF members to deliver the simplification and streamline objective that they have set themselves and that has been agreed to by 138 countries.

For more information, contact a KPMG tax professional in Washington National Tax:

Jessie Coleman | jessiecoleman@kpmg.com

Alistair Pepper | alistairpepper@kpmg.com

Thomas Bettge | tbettge@kpmg.com