Latest developments in Amount B (BEPS 2.0)

On 19th February, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting published its report on Amount B under Pillar One, which provides a simplified and streamlined approach for baseline marketing and distribution activities.

As reported by multiple low-capacity jurisdictions, between 30% to 70% of transfer pricing disputes in these countries relate to baseline marketing and distribution activities.  The OECD’s aim is therefore to enhance tax certainty and to relieve compliance burdens for taxpayers and tax administrations alike, particularly those in low-capacity jurisdictions with limited resources.  

The current guidance (OECD Amount B Report, February 2024), published on 19 February, has been incorporated into the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 as an Annex to Chapter IV, with additional guidance expected to be concluded by 31 March 2024.  This is the latest development in the ongoing Amount B work, which builds on and incorporates the comments from the OECD’s July 2023 public consultation document on Amount B (July 2023 Amount B document).

Why is this important?

• There is no threshold for Amount B, unlike Amount A (EUR 20bn) under Pillar One or Pillar Two (EUR 750mn).

Main points from the OECD report

Qualifying transactions 

The following controlled transactions are qualifying transactions for the simplified and streamlined approach:

• Buy-sell marketing and distribution transactions where the distributor purchases goods from one or more associated enterprises for wholesale distribution to unrelated parties; and
• 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-scope transactions must have the following criteria (which should be based on a 3-year weighted average with that 3-year weighted average ratio calculated on a year-on-year basis):

• The qualifying transaction must exhibit economically relevant characteristics; meaning it can be reliably priced using a one-sided transfer pricing method, with the distributor, sales agent or commissionaire being the tested party.
• The tested party in the qualifying transaction must not incur annual operating expenses lower than 3% or greater than an upper bound of between 20% and 30% of the tested party’s annual net revenues.
• The guidance in this report sets out the characteristics of in-scope distributors, which cannot, for example, assume certain economically significant risks or own unique and value intangibles.
• A 3-step simplified pricing framework with a 3-step process for determination of in-scope distributors has also been provided in the report.
• The pricing matrix has a total of 15 distinct target returns, with the overall range of return on sales ranging from 1.5% to 5.5%.

 Exclusions

• The distribution of commodities and digital goods is excluded from the scope of Amount B.  
• Services (including digital services) are excluded as well.

Elective process

• Jurisdictions can choose to apply the simplified and streamlined approach to qualifying transactions of eligible baseline distributors in their jurisdictions for fiscal years commencing on or after 1 January 2025.
• A jurisdiction that chooses to apply the simplified and streamlined approach may choose one of the following two options, which specify which party or parties can assert the simplified and streamlined approach.
  • Option 1:  A jurisdiction can allow tested parties within the country to elect and apply the simplified and streamlined approach.
  • Option 2:  A jurisdiction can specify that all taxpayers within the country should apply the simplified and streamlined approach where the scoping criteria are met.

Caveats

• The elective process currently adopted by the OECD could potentially pose challenges on the application of the rules as well as providing certainty to taxpayers.
• The document has noted concerns raised by India which could indicate some disagreements still being present among the Inclusive Framework countries. 

Our Comments

• This is another significant milestone for the OECD.
• Irrespective of how the open questions / disagreements are resolved, we would highlight the need for taxpayers to have robust functional analyses in order to determine and categorise the in-scope and out-of-scope entities with regard to the baseline marketing and distribution activities.
• For the moment, it would be crucial for taxpayers to review and analyse the guidance to understand if they fall within the scope of Amount B and model potential outcomes to determine if updates to the current transfer pricing model or policy are in order.

Get in touch

If any of the latest developments in Amount B affect you, please contact one of our key contacts below.

* Published March 2024