Amount B public consultation document released – key details
On December 8, 2022, the OECD released a public consultation document detailing the main design elements of Amount B of Pillar One. The document seeks input from stakeholders on the proposed technical rules for simplifying and streamlining the application of the arm’s-length principle to in-country baseline marketing and distribution activities.
As described in the consultation document, Amount B would apply a standardized approach for determining the amount of profit to be earned by commonly controlled taxpayers that conduct in-scope routine marketing and distribution activities.
Comments on the draft documentation may be submitted until January 25, 2023 and will be considered by the OECD’s mandated working party as it seeks to finalize the Amount B rules by mid-2023. OECD currently expects Amount B to be fully implemented in 2024.
In line with the commitment of the OECD/G20 Inclusive Framework on BEPS (IF) reached in October 2021, the consultation seeks to address the challenges that many IF member jurisdictions face in applying existing transfer pricing rules due to limited enforcement resources to administer these fact-intensive rules. The Amount B document also seeks to enhance tax certainty and reduce resource-intensive tax disputes. The public consultation document provides the first detailed insights into how the IF believes Amount B could operate since the publication of the Pillar One Blue Print more than two years ago.
Although Amount B forms a core part of Pillar One of the OECD’s two-pillar solution addressing the tax challenges arising from the digitalization of the economy, the Amount B discussion document is currently limited to sales and purchases of tangible goods. While Amount A of Pillar One calls for the provision of taxing rights to market jurisdictions instead of a formulaic reallocation of some residual profits, Amount B is not aimed at allocating additional taxing rights to the market jurisdictions, nor it is limited to groups above a certain revenue or profitability threshold.
Instead, Amount B aims to simplify and streamline the pricing of in-country baseline marketing and distribution activities while ensuring outputs consistent with the arm’s-length principle for all in-scope transactions, as well as delivering tax certainty and reducing compliance costs businesses incur due to transfer pricing disputes.
The major design elements of Amount B, as described in the consultation document, include rules concerning the scope of Amount B, the applicable pricing methodology for the purposes of Amount B, the documentation requirements imposed on taxpayers when applying Amount B and the tax certainty framework used to resolve disputes arising from the application or operation of Amount B.
The scope of Amount A defines the controlled transactions that would be subject to Amount B and sets out detailed quantitative and qualitative criteria to assist in that determination.
According to the public consultation document, Amount B would cover buy-sell arrangements in which a tested party purchases tangible goods from one or several associated parties and engages in wholesale distribution to unrelated customers, most of which are in its local market. The draft rules may also apply to sales agency and commissionaire arrangements, although the document acknowledges that seeking to cover these different types of arrangements may create challenges in establishing a standardized pricing methodology. The draft notes that IF members hold differing views on whether the inclusion of those arrangements would be appropriate and feasible.
In addition, the consultation requests comments on certain exclusions proposed in the document, such as distribution and marketing of services (including financial services) or digital property (such as software).
The document clarifies that the terms of existing APAs should be respected and that APAs will continue to play an important role in creating tax certainty in spite of the introduction of Amount B.
Amount B pricing methodology
This section discusses – from a high-level perspective – the pricing methodology that could apply to in-scope transactions. The proposed Amount B pricing methodology (ie, the transactional net margin method or TNMM) shall align with current transfer pricing practices, whereby a benchmarking analysis would be performed, by major industry groupings, on a set of financial data of publicly available comparable financials.
The document notes that discussions are ongoing regarding the appropriate arm’s-length profit range for each in-scope transaction and raises questions regarding whether different profit-level indicators and arm’s-length returns may be required depending on the in-scope transaction, making this an important area for comment.
Despite the document’s current OECD-authorized three-tiered approach to transfer pricing documentation – consisting of a master file, local file and country-by-country report – the consultation document also provides an extensive list of additional documentation and contractual requirements for administration of Amount B. The requirement for additional Amount B documentation is likely to elicit many taxpayer comments.
Interestingly, this section discusses whether a business could restructure to fall within – or fall outside – the scope of Amount B and implies that IF members may implement different measures to restrict and/or limit the access to Amount B in some cases.
The last section of the public consultation document aims at addressing the concerns raised by the global tax community around tax certainty, dispute prevention and resolution – but it remains unclear what processes, other than the Mutual Agreement Procedure and, potentially, existing treaty arbitration provisions, IF members are considering putting in place for the purposes of Amount B.
Although the public consultation document does not reflect the final views of the IF, it provides businesses initial insights as to how Amount B could operate once implemented. However, there are numerous areas where clarifications are still required or where improvements could be made. Companies are encouraged to begin assessing the impact of Amount B on their business models and provide comments on any challenges or unintended outcomes the Amount B rules may bring.
For more information, please contact either of the authors.