“Pillar One – Amount B” – an Update

Within the framework of the BEPS 2.0 project a preliminary report on Pillar One – Amount B (launch version) was published on 19 February 2024 as a response to the public consultation documents (December 2021 & July 2023). The final report, including the outstanding work currently being completed, was expected by the end of March 2024 and will be integrated into the OECD Transfer Pricing Guidelines.

As already detailed in our newsletter dated 4 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 authorities. Standardised remuneration is intended to achieve outputs consistent with the arm’s length principle, while factors such as the respective industry will be taken into account.

This entry summarises the key points and offers an overview of the expected additional provisions.

Implementation

Amount B will be included as an annex to Chapter IV in the OECD Transfer Pricing Guidelines. Furthermore, a corresponding amendment to the Commentary on Article 25 of the OECD Model Tax Convention is planned.

The report clarifies that there is no obligation to implement Amount B for states that are members of the Inclusive Framework. If a member state decides to implement Amount B, this state will be able to decide whether Amount B will be mandatory or optional for taxpayers that meet the scoping criteria.

The fact that an arm’s length result determined based on Amount B for one state will not be binding for the state of the transaction partner is to be considered in a critical light. Nevertheless, if the approach is applied by so-called “low-capacity jurisdictions”, Inclusive Framework states commit to respect the output determined based on Amount B and to take appropriate steps to prevent possible double taxation with DTA partner states.

The report provides that Amount B may be implemented from financial years beginning on or after 1 January 2025.

Scope

Unlike Amount A, Amount B is not linked to a specific revenue threshold, and is thus potentially applicable for a large number of companies. The following transactions are in scope:

• 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.

The following significant scoping criteria apply regarding the scope of Amount B:

• The distribution transaction must be reliably definable and priced using a one-sided transfer pricing method.
• Operating expenses as the basis for distribution transactions must not be lower than 3% and greater than 20-30% of annual net revenues arising from distribution activity (quantitative criterion).

Qualifying transactions will nevertheless be out of scope of Amount B if:

• the qualifying transaction involves the distribution of non-tangible goods, services or the marketing, trading, or distribution of commodities; or
• the company carries out non-distribution activities in addition to the distribution transaction if this non-distribution activity cannot be evaluated and priced on a separate basis.

Companies engaging in both wholesale and retail distribution are in scope for Amount B if the retail distribution activity does not exceed 20%.

Compared to the Consultation Document of July 2023, the exclusion of “digital goods” was amended to “non-tangible goods”.

Furthermore, the upper bound of the quantitative criterion which initially was at 30% (“Alternative A”) and 50% (“Alternative B”) was adjusted. The upper bound may be set between 20% and 30% by each state individually. This may create further potential for conflict when applying Amount B.

Pricing

As initially envisaged, the arm’s length margin for activities in scope for Amount B is determined mainly mechanically by applying the Transactional Net Margin Method and the ratio “return on sales” via a pricing matrix. This is based on allocation to one of three “industry groupings” considering factor intensity, meaning different characteristics of the parameters “net operating asset intensity” (OAS) and “operating expense intensity” (OES). The pricing matrix is derived from a global dataset.

The applicable range for return on sales continues to lie between 1.5% and 5.5%. However, compared with the Consultation Document of July 2023, changes have been made within the pricing matrix. Another new addition is that a weighted average return on sales is to be determined if the activities in scope of Amount B fall into more than one industry grouping (threshold 20%).

Another amendment is the introduction of an “operating expense cross-check” introduced as a further guardrail replacing calculation based on the Berry ratio. Here, the return on sales for baseline marketing and distribution transactions will be adjusted if the “return on operating expenses” falls outside of a pre-defined range. The return will then be adjusted until the respective cap or collar is reached. Higher thresholds were set for certain “qualifying jurisdictions”.

The option to publish a local pricing matrix in order to take geographic differences into account has been removed from the report in its entirety.

For qualifying jurisdictions insufficiently represented in the global database, the report still provides for a further adjustment of the returns on sales (net risk adjustment percentage).

Documentation

The chapter on documentation requirements is mainly consistent with the Consultation Document. In accordance with this chapter, taxpayers are required to substantiate the applicability of Amount B with supporting information in their local files and include a consent to apply the approach for a minimum of 3 years in the case of first-time application of Amount B.

Tax certainty and elimination of double taxation

The elimination of double taxation is discussed in more detail than in the Consultation Document. However, the contribution to tax certainty and efficient elimination of double taxation is unclear, since use cannot be made of Amount B if a state has not implemented Amount B.

Appendix

Another new addition is the inclusion of an appendix with examples illustrating the application of Amount B.

Outstanding final activities

The report published on 19 February 2024 leaves some matters unresolved, which will be addressed in the near future. These include in particular:

• Addition of a further qualitative criterion, the application of which by the member states will be optional.
• Addition of a list of all states qualifying as low-capacity jurisdictions.
• Criteria for and/or a list of qualifying jurisdictions.
• Revision of the Commentary on Article 25 of the OECD Model Tax Convention.

Conclusion

In principle, the Amount B framework could represent an attractive option for companies in scope to reduce uncertainty concerning the arm’s length remuneration of distribution activities in the future. Whether the goal of a simplified and streamlined approach as well as the effective reduction of transfer pricing conflicts regarding pricing of baseline marketing and distribution activities is reached ultimately depends on homogenous implementation of Amount B in the individual Inclusive Framework states. Given the variety of options granted to Inclusive Framework states, there are concerns as to whether this approach will indeed constitute a simplification. It is also the case that for companies that engage in activities beyond baseline marketing and distribution activities, Amount B will result in higher requirements on data quality due to the required segmentation of the balance sheet and the income statement. Therefore, it remains to be seen how the declared goals of Amount B will be realised in the future.

Author: Florian Egner