The Organisation for Economic Co-operation and Development (OECD) has introduced Pillar One Amount B, a framework designed to streamline and simplify the application of the arm’s-length principle to baseline marketing and distribution activities, particularly benefiting low-capacity countries. Unlike other BEPS 2.0 measures, Amount B is not subject to a revenue threshold, making it applicable to a broad range of multinational businesses.
On February 19, 2024, the OECD released its final report on Pillar One Amount B (the Report).
The Report has been incorporated into the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 (OECD TP Guidelines). This framework is particularly beneficial for low-capacity countries, addressing concerns raised by the African Tax Administration Forum (ATAF), which has described the changes as “vital” for the OECD Transfer Pricing Guidelines and potentially a “game changer” for transfer pricing in Africa.
The report highlights that in many low-capacity jurisdictions, between 30-70% of transfer pricing disputes involve marketing and distribution activities. By incorporating Amount B into the OECD Transfer Pricing Guidelines, jurisdictions now have the option to apply standardized, bright-line rules, enhancing tax certainty, reducing disputes, and preserving tax administration resources. The simplified pricing framework determines a return on sales for eligible distributors, lowering compliance costs for businesses while ensuring a more predictable tax environment.
AMOUNT B APPROACH TIMELINE
Jurisdictions can adopt the Amount B approach for relevant transactions starting from fiscal years commencing on or after January 1, 2025. The framework provides guidance on determining in-scope transactions, pricing methodologies, and the exclusions related to non-tangible goods and services as well as commodities trading.
BACKGROUND AND DEVELOPMENT
The OECD’s work on Amount B stems from the October 2021 agreement within the Inclusive Framework on BEPS, outlining key parameters of Pillars One and Two. The framework was initially introduced in a December 2022 working draft, followed by a second consultation in July 2023, leading to the final report’s release in February 2024.
The Report outlines the characteristics of in-scope distributors and sales agents, prescribing a three-step analysis to determine a return on sales. It also provides clarity on documentation requirements, transitional issues, and tax certainty considerations.
KEY FEATURES OF AMOUNT B
1. Scope and Applicability
Amount B applies to wholesale distribution transactions where goods are purchased from associated enterprises and sold to unrelated parties. This includes:
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Buy-sell transactions
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Sales agency and commissionaire arrangements
However, trading in non-tangible goods, services, and commodities is explicitly excluded.
To qualify, a transaction must be sufficiently simple to be priced using a one-sided transfer pricing method (i.e., the transactional net margin method or TNMM). Transactions involving unique contributions, significant risks, or high levels of integration between entities are out of scope.
2. Implementation and Jurisdictional Choice
Jurisdictions can elect to implement Amount B in one of two ways:
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Allowing tested parties to opt in
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Mandating its application for all eligible entities
The OECD will maintain a list of jurisdictions adopting Amount B. However, it will not constitute a binding pricing mechanism for jurisdictions that do not adopt the framework.
3. Pricing Methodology
Amount B relies on a structured pricing matrix, determining the appropriate return on sales based on:
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Industry classification
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Operating asset intensity
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Operating expense intensity
The arm’s-length range of returns varies from 1.50% to 5.50%, depending on these factors.
4. Operating Expense Cross-Check
To ensure reasonable profit allocation, an operating expense cross-check mechanism is applied:
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Cap rates: Range from 40% to 80%, depending on jurisdiction
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Collar rate: Set at 10% to prevent extreme deviations
5. Documentation Requirements
Entities applying Amount B must maintain a local file documenting:
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Functional analysis
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Contracts and agreements
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Pricing calculations
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Justification for the application of Amount B
Taxpayers must also commit to using Amount B for at least three years unless a material business change occurs.
ADDITIONAL WORK AND FUTURE DEVELOPMENTS
The Report outlines several ongoing initiatives:
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Updated Commentary on Article 25 of the OECD Model Tax Convention, focusing on tax certainty and dispute resolution (expected soon)
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Additional qualitative scoping criteria, to be finalized by March 31, 2024
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List of low-capacity jurisdictions, expected by March 31, 2024
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Competent authority agreements to prevent double taxation, under development throughout 2024
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Assessment framework for evaluating Amount B’s practical application post-implementation
