“Pillar One –Amount B” – OECD publishes public consultation document

Under the BEPS 2.0 project the OECD published another public consultation document on Amount B of Pillar One on 17 July 2023. Stakeholders were invited to provide input until 1 September 2023.

The declared goal of Amount B is to simplify and streamline the application of transfer pricing regulations for baseline marketing and distribution activities, thereby aiming at enhancing tax certainty and reducing disputes between taxpayers and tax administrations. Amount B is intended to simplify the application of the arm’s length principle by introducing standardised remuneration for such transactions. The standardised remuneration is intended to achieve outputs consistent with the arm’s length principle, while factors such as industry or region will be taken into account.

Implementation

Regarding implementation, Amount B is designated to be included in the OECD transfer pricing guidelines already at the beginning of 2024. The wording of the consultation document indicates that no mandatory application of Amount B will be required also when all criteria are fulfilled, instead it would be a safe-harbour rule that taxpayers might opt for. In order to avoid potential misuse of the framework by tax authorities it would be important to explicitly integrate in the document that the application of Amount B is not mandatory and does not constitute a minimum remuneration (neither for “baseline” activities not applying Amount B, nor for “non-baseline” activities) – similar to how the low value-adding intra-group services (“LVAS”) were implemented.

Scope

In contrast to Amount A, Amount B is not restricted to large multinational enterprises, but has a broader field of application. Baseline distribution arrangements lie at the core of Amount B. The following distribution transactions are included in Amount B:

• Buy-sell marketing and distribution transactions where the distributor purchases goods from one or more associated enterprises for wholesale distribution to unrelated parties.
• Sales agency and commissionaire transactions where the sales agent or commissionaire contributes to one or more associated enterprises’ wholesale distribution of goods to unrelated parties.

Scoping criteria

In order to apply Amount B, distributors may only perform other economically relevant transactions (e.g. research & development, production, …), if they can be adequately evaluated and distinguished from distribution activities from a transfer pricing perspective. Further, distribution of commodities and services is expected to be excluded from the scope of Amount B. Amount B will also not be applied to retail transactions, unless they are of minor importance within a wholesaler’s overall business (less than 20% of its total annual net sales).

Moreover, a series of scoping criteria is to be taken into account, such as adhering to certain key figures (e.g. adhering to a specific ratio of annual operating expenses to net revenue). In the public consultation document, the OECD asks for comments, whether

• only quantitative criteria are sufficient (“Alternative A”) or whether
• additionally, also qualitative criteria are to be included based on non-exhaustive examples (“Alternative B”).

Apparently, the Member countries of G20/OECD Inclusive Framework do not agree on this matter.

Remuneration

A pricing matrix applying the Transactional Net Margin Method (TNMM) with Return on Sales (ROS) as Profit Level Indicator (PLI) will be used for largely automated pricing under Amount B.

When applying this matrix, the tested party is allocated an amount indicated in the matrix based on industry and economical key figures (net operating asset intensity and operating expense intensity). The pricing matrix differentiates between three industry categories and five factor intensity categories (calculated from operating asset to sales intensity and operating expense to sales intensity). In total there will be 15 values. The public consultation document already included a pricing matrix based on analysed data from the BvD Orbis database. For this purpose a global dataset of comparable companies was used.

In order to account for geographic differences, the pricing matrix will be modified based on country risks which will apply to a set of qualifying jurisdictions not yet defined by the OECD. Furthermore, tax administrations in specific jurisdictions where data availability could be an issue will be entitled to publish a pricing matrix based on local datasets.

The OECD invites interested stakeholders to send their comments and empirical analyses regarding the pricing matrix.

Documentation requirements

The documentation requirements when applying Amount B are fundamentally built on the documentation requirements for transfer prices of Chapter V of the OECD Transfer Pricing Guidelines. When applying a pricing matrix, conducting a benchmarking study for baseline marketing and distribution activities may be omitted. However, taxpayers will be required to substantiate the applicability of Amount B in their local files.  Also, when the taxpayer applies Amount B for the first time, they should explicitly consent to applying the approach for a minimum of 3 years.

Conclusion

The OECD’s initiative for a simplified and streamlined approach to determine transfer prices thereby enhancing tax certainty for routine transactions in the field of distribution is fundamentally desirable. The regulations in their current form are complex and leave room for interpretation. The issues introduced by the OECD in the public consultation paper show that international consensus has not yet been reached on this topic. Practise will show the extent in which the objectives of Amount B can be reached.

Author: Alexander Proier