The Organization for Economic Co-operation and Development (OECD) Inclusive Framework released the report on Pillar One's Amount B1, marking a significant milestone in international tax reform efforts. This comprehensive document captures the collective feedback garnered from a broad spectrum of stakeholders during extensive consultations. The aim is to simplify tax compliance for businesses and enable tax authorities to dedicate more resources to complex issues, thereby improving the efficiency and effectiveness of tax administration globally.

The inception of 'Amount B' was announced in an October 2021 statement, with the objective of standardizing the application of the arm's length principle specifically for marketing and distribution functions across different countries. This initiative was particularly targeted at assisting countries with limited resources in tax administration.

Following the initial proposal, the OECD sought feedback on a working draft in December 2022, acknowledging the need for a consensus within the Inclusive Framework, which was still pending at that time. By July 2023, notable advancements were made in the development of the Amount B framework, as detailed in a subsequent consultation document.

However, this document also highlighted that certain issues were still under consideration. An integral part of this report is the annexure titled "Special Considerations for Baseline Distribution Activities," which has been incorporated into the 2022 OECD Transfer Pricing Guidelines.

What is Amount B

Amount B is an optional simplified and standardized remuneration for eligible distributors that perform "baseline marketing and distribution activities" within multinational groups.

The report defines the criteria for eligibility and outlines the exclusions, particularly in relation to risk and ownership of intangible assets. It sets forth a three-step pricing approach designed specifically for these distributors, along with comprehensive guidelines on documentation, transitional measures, and enhancing tax certainty.

The report gives jurisdictions the flexibility to adopt this approach for qualifying transactions from fiscal years starting on or after 1 January 2025. This move is expected to harmonize tax practices worldwide, reduce disputes, and promote a more transparent, fair, and efficient international tax environment.

Qualifying Transactions for the simplified and streamlined approach

  • Buy-sell marketing and distribution transactions - where a distributor purchases goods from its Associated Enterprise (AE) for wholesale distribution to unrelated parties.
  • Sales Agency and commissionaire transaction – where the entity contributes to AE in relation to wholesale distribution of goods to unrelated enterprises.

Scoping Criteria

Inclusions

  • The qualifying transaction must exhibit economically relevant characteristics, i.e., 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.

Exclusions

  • The distribution of non-tangible goods, services, or marketing, trading, or distribution of commodities and whether the tested party carries out non-distribution activities in addition to the qualifying transaction. 
  • The tested party carries out non-distribution activity (in addition to the qualifying activity) that can be separately evaluated.

Application of Most Appropriate Method(MAM)

Regarding in-scope transactions, it is not mandatory to evaluate each of the prescribed methods when choosing the MAM. The Transaction Net Margin Method (TNMM) is usually chosen as the MAM.

However, it is recognized that there may be instances where the usage of Comparable Uncontrolled Price (CUP) could be more appropriate where internal comparable exists and, hence, that can be applied.

Determination of Arm's Length Return

The report has provided a benchmarking search criteria (using Moody's BvD Orbis Database) that provides the basis of the suggested pricing matrix. The benchmarking included an initial research of database filtering, followed by a manual review of companies and a quantitative review of company data from a global dataset of companies involved in baseline marketing and distribution activities.

The approximation of the arm's length results has been translated into the 'pricing matrix,' which is based on the return on sales as the profit level indicator.

The arm's length results are for specified levels of Operating Asset to Sales intensity (OAS) and Operating Expense to Sales intensity (OES). The matrix also distinguishes between different types of industries, which are classified into three groups. Distributors have been characterized into three predefined groups. This categorization is based on the relationships between certain industries or products and the profit associated with the basic distribution of those products. Each of the three groups includes different categories of goods.

Footnote

1. https://www.oecd.org/tax/beps/release-of-report-on-amount-b-relating-to-the-simplification-of-transfer-pricing-rules-andconforming-changes-to-the-commentary-of-the-oecd-model-tax-convention.htm 

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