“Pillar One – Amount B” – Publication of covered jurisdictions and qualifying jurisdictions

Within the framework of the BEPS 2.0 project, the report on Pillar One – Amount B (“Report on Amount B” or “the Report”) was published on 19 February 2024 and incorporated as an Annex to Chapter IV of the OECD Transfer Pricing Guidelines (for further details, please see our previous newsletter). Two supplements to the Report were subsequently published in June 2024. These are statements containing three separate country lists relevant to the implementation of Amount B.

The launch version of the Report on Amount B that was published in February 2024 stated that final additions to the Report would be incorporated by 31 March 2024. These additions were to include the definition of the countries covered by the political commitment on Amount B (originally referred to as “low-capacity jurisdictions”), as well as the definitions of “qualifying jurisdictions” within the meaning of sections 5.2 and 5.3 of the Report. These three lists of countries were now published in June 2024.

In a notable change of terminology from the Report, “low-capacity jurisdictions” are now referred to using the neutral term “covered jurisdictions”, following the extension of the political commitment to certain low- and middle-income OECD and G20 members. Further information on these lists and the difference between them is provided below.

The Report on Amount B published in February 2024 also stated in its introduction that work was continuing on an additional optional qualitative scoping criterion that jurisdictions might choose to apply as an additional step to identify distributors performing non-baseline activities. Nevertheless, the statements published in June 2024 did not contain any such scoping criterion. It has also been clarified that the publication of these lists was the final step to be completed to enable implementation of Amount B from 1 January 2025. This implies that the additional optional qualitative scoping criterion will not be added prior to implementation. The change may have an impact on the implementation of Amount B, as India had explicitly noted that this step was “critical to ensure only baseline distributors are in scope”.

Covered jurisdictions

The Report on Amount B published in February 2024 clarified that there is no general obligation for states that are members of the OECD/G20 Inclusive Framework on BEPS to implement Amount B within their own jurisdictions. If Inclusive Framework members decide to implement Amount B, these states will be able to decide whether Amount B will be mandatory or optional for taxpayers in their jurisdiction that meet the scoping criteria.

At the same time, under the political commitment on Amount B, Inclusive Framework members commit to recognizing outcomes determined following the Amount B guidance if Amount B is implemented by a ‘covered jurisdiction’. It is important to note that such jurisdictions are also not required to implement Amount B. Nevertheless, if a covered jurisdiction chooses to implement Amount B, other Inclusive Framework members are required to respect the outcomes. Members can also opt to extend such binding recognition to other countries on a bilateral basis.

The list of covered jurisdictions contains Inclusive Framework jurisdictions that qualify as low- and middle-income countries using the World Bank Group country classifications by income level (excluding EU, OECD, and G20 member countries). Countries that meet these criteria that are not Inclusive Framework members but express a willingness to apply Amount B can also be added to the list.

OECD and G20 members of the Inclusive Framework that are also low- and middle-income countries according to the World Bank country classifications could opt to qualify as a covered jurisdictions if they expressed an interest in applying Amount B to the Inclusive Framework by March 2024.

The statement published in June 2024 notes that the middle-income countries Argentina (G20), Brazil (G20), Costa Rica (OECD), Mexico (OECD & G20), and South Africa (G20) have already expressed an interest in applying Amount B. If Amount B is implemented in these states, Inclusive Framework members would be required to respect Amount B outcomes for limited-risk distributors, sales agents and commissionaires operating in these countries. The Report notes that several states may review their political commitment to Amount B if such middle-income states remain covered jurisdictions after the five years have elapsed, or if these states do not sign the Multilateral Convention on Amount A by the end of 2025.

The list of covered jurisdictions includes the following countries from Austria’s top 50 export destinations in 2023: Bosnia and Herzegovina, Brazil, Egypt, Kazakhstan, Malaysia, Mexico, Serbia, South Africa, Ukraine.

Qualifying jurisdictions (operating expense cross-check)

The Amount B guidance envisages two standardized adjustments to the main return on sales (“RoS”) pricing matrix. The first adjustment of this kind is the operating expense cross check, which is a guardrail that applies to all in-scope transactions. It functions by determining whether a defined ratio (equivalent return on operating expense, i.e. the return on operating expense when applying the adjusted RoS) falls within a cap-and-collar range. Cap rates or collar rates apply if the ratio falls outside the range, which have the effect of decreasing or increasing the RoS under Amount B. Higher cap rates apply for qualifying jurisdictions, which mean that the capped RoS under Amount B for entities in qualifying jurisdictions is higher than that for entities in non-qualifying jurisdictions.

Qualifying jurisdictions for the operating expense cross check are those classified by the World Bank Group as low income, lower-middle income, and upper-middle income based on the World Bank Group country classifications by income level. The list is fixed by the OECD for a five-year period.

The list of qualifying jurisdictions for the operating expense cross-check includes the following countries from Austria’s top 50 export destinations in 2023: Bosnia and Herzegovina, Brazil, Bulgaria, China, Egypt, India, Kazakhstan, Malaysia, Mexico, Serbia, South Africa, Türkiye, Ukraine.

Qualifying jurisdictions (data availability mechanism)

The second adjustment of the RoS range under Amount B is the net risk adjustment applied under the data availability mechanism in section 5.3 of the Report, which is intended to account for cases where there is no or insufficient data in the global dataset for a particular tested party jurisdiction. The sovereign credit rating of the jurisdiction (as issued by Moody’s Investors Service, S&P Global Ratings, and Fitch Ratings) is used in combination with an additional matrix of net risk adjustment percentages set out in the Report on Amount B. As a result, it may be possible for an entity in a qualifying jurisdiction to (further) increase the RoS range calculated in line with the Amount B guidance. For jurisdictions with sovereign credit ratings of BBB+ or BBB, the net risk adjustment is currently set at 0%. However, for jurisdictions with ratings between BBB- and CCC- (or lower), the net risk adjustment can range from 0.3% to as much as 8.6%.

Qualifying jurisdictions for the data availability mechanism are those with (i) a publicly available long term sovereign credit rating of BBB+ (or equivalent) or lower from a recognized independent credit rating agency, and (ii) less than 5 comparables in the global dataset used by the OECD to calculate Amount B remuneration. The list is fixed by the OECD for a five-year period.

The list of qualifying jurisdictions for the data availability mechanism includes the following countries from Austria’s top 50 export destinations in 2023: Brazil, Egypt, Indonesia, Kazakhstan, Malaysia, Mexico, South Africa.

Differences between the country lists

The lists of qualifying jurisdictions, which are broadly similar, are substantially longer than the list of covered jurisdictions. As regards the differences between the lists, the following points should be noted:

• All covered jurisdictions are also qualifying jurisdictions for the operating expense cross-check.
• Certain jurisdictions are covered jurisdictions, but not qualifying jurisdictions for the data availability mechanism: Bosnia and Herzegovina, Serbia, Thailand, Ukraine, Viet Nam.
• Certain jurisdictions, which are not covered jurisdictions, are qualifying jurisdictions for the operating expense cross-check, but not for the data availability mechanism: Bulgaria, China, Colombia, India, Türkiye.
• Certain jurisdictions are qualifying jurisdictions for the data availability mechanism, but not for the operating expense cross-check: Andorra, Bahrain, Barbados, Cook Islands, Curaçao, Montserrat, Oman, Panama, San Marino, Seychelles, Trinidad and Tobago, Turks and Caicos Islands, Uruguay.

Outlook

The publication of the country lists is a significant milestone prior to the implementation of Amount B by the 147 members of the Inclusive Framework.

The country lists will be valid for five years, with updates subsequently posted on the OECD website.

However, it remains to be seen whether and how Amount B will be implemented in Austria and other countries, and whether outcomes for covered jurisdictions will be respected, as various outcomes may arise from the specific approaches taken.

Overall, Amount B could in the future represent an attractive option for companies to reduce uncertainties regarding arm’s length compensation of baseline marketing and distribution activities. 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 realized in the future.

Author: Edward Saunders