Pillar One - Amount B

Introduction

In its Statement of October 2021, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (Inclusive Framework) agreed to simplify and streamline the application of the arm’s length principle to in-country baseline marketing and distribution activities, with a particular focus on the needs of low-capacity jurisdictions. In July 2023, the Inclusive Framework agreed to publish a final Amount B report, content from which would be incorporated into the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 by January 2024 with due consideration given to both the needs of low-capacity jurisdictions, and the interdependence of Amount B with the signing and entry into force of the Multilateral Convention to Implement Amount A of Pillar One (“MLC”).1

This report responds to the mandate of the Inclusive Framework by providing an optional simplified and streamlined approach – formerly referred to as Amount B – that jurisdictions can choose to apply to in-scope distributors resident in their jurisdictions.2 It reflects the consensus of the Inclusive Framework and takes account of comments received in response to the public consultation documents released on 8 December 2022 and on 17 July 2023. As part of the current workstream, the Inclusive Framework is working on an additional optional qualitative scoping criterion that jurisdictions may choose to apply as an additional step to identify distributors performing non-baseline activities for the purpose of the simplified and streamlined approach. The Inclusive Framework will conclude this work by 31st March 2024, with any additions to be incorporated into the OECD Transfer Pricing Guidelines.3

The simplified and streamlined approach draws from the general principles outlined in the OECD Transfer Pricing Guidelines and is incorporated into the OECD Transfer Pricing Guidelines as an Annex to Chapter IV. Notably, nothing in the guidance contained in this report should be construed as a basis to interpret the application of the general principles in the remainder of the OECD Transfer Pricing Guidelines with respect to any transactions, nor should this guidance be interpreted as revising those principles. Following the publication of this report, jurisdictions can choose to apply the simplified and streamlined approach for in-scope transactions of tested parties in their jurisdictions for fiscal years commencing on or after 1 January 2025.

Jurisdictions can choose to apply the simplified and streamlined approach to the qualifying transactions of their in-scope tested parties according to the options articulated in Section 2 of this report. Similar to other elective approaches in the OECD Transfer Pricing Guidelines, the outcome determined under the simplified and streamlined approach by a jurisdiction that has chosen to apply the simplified and streamlined approach to qualifying transactions of its in-scope tested party is non-binding on the counter-party jurisdiction where the associated enterprise that is a party to the controlled transaction is located. However, subject to their domestic legislations and administrative practices, members of the Inclusive Framework commit to respect the outcome determined under the simplified and streamlined approach to in-scope transactions where such approach is applied by a low-capacity jurisdiction4 and to take all reasonable steps to relieve potential double taxation that may arise from the application of the simplified and streamlined approach by a low-capacity jurisdiction where there is a bilateral tax treaty in effect between the relevant jurisdictions.5 The Inclusive Framework will work on the implementation of this commitment in 2024, including through the development of competent authority agreements that could be used within the context of bilateral tax treaty relationships, taking into consideration the dual objective of bilateral tax treaties to avoid double taxation, as well as to prevent double non-taxation. The Inclusive Framework will agree on the design elements and on the list of low-capacity jurisdictions within scope of this commitment by consensus in 2024. The Inclusive Framework will agree on the list of low-capacity jurisdictions by 31 March 2024.6

Section 3 of this report describes and defines the set of qualifying transactions within scope of this simplified and streamlined approach, and consequently the characteristics of in-scope distributors. In-scope distributors, for instance, should not own unique and valuable intangibles nor should they assume certain economically significant risks. The simplified and streamlined approach allows in-scope distributors to perform non-distribution transactions when they can be adequately evaluated and reliably priced on a separate basis under the general principles of the OECD Transfer Pricing Guidelines. It also permits the undertaking of de minimis retail sales, while excluding the distribution of digital goods, commodities and services from scope.

Section 4 of this report explains the relationship of this simplified and streamlined approach to the most appropriate method principle, and Section 5 sets forth a 3-step process for determining a return on sales for an in-scope distributor which provides an approximation of an arm’s length result. This pricing framework includes a matrix of returns7; an operating expense cross-check mechanism8; and a data availability mechanism.9 10 Sections 6 and 7 deal with documentation and transitional issues while Section 8 discusses tax certainty and the elimination of double taxation.

The Inclusive Framework directs Working Party 1 to develop text for inclusion in the commentary on Article 25 of the OECD Model Tax Convention to provide appropriate signposts to the agreed wording of this report, in particular in Section 8. Working Party 1 would work on the development of these changes in 2024 with the aim of including them in the next update of the OECD Model Tax Convention.

The Inclusive Framework will gather information on the practical application of the simplified and streamlined approach once it has been in operation for a period of time. The framework to gather such information will be developed in 2024.11 The design of such framework will build on information available from jurisdictions’ current reporting requirements and audit practices and account for the resources needed to undertake this exercise. Therefore, it should not impose an unreasonable administrative burden on tax administrations. In addition, consideration could be given to produce further implementation guidance, as needed.

Notes

← 1.  OECD (2023), Outcome Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy – 11 July 2023 (https://www.oecd.org/tax/beps/outcome-statement-on-the-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-july-2023.htm).

← 2.  The content of this report, including any design elements, should be considered without prejudice to any future work on Amount B, such as on the interdependence of Amount B with the signing and entry into force of the MLC.

← 3.  Note by India: India believes that an appropriately designed qualitative criterion is critical to ensure that only baseline distributors are in scope of Amount B. India expresses inability to support the Amount B work further if such a criterion is not incorporated as part of the scoping criteria in this report.

← 4.  The list of low-capacity jurisdictions considered for these purposes will be made available on the OECD website.

← 5.  Some members of the Inclusive Framework may be able and willing under their domestic legislations and administrative procedures to extend this commitment to cases where no bilateral tax treaty exists.

← 6.  Note by India: India expresses its inability to make a political commitment in respect of an undefined set of jurisdictions termed as “LCJ” in an incomplete Amount B report. India believes that the report should be completed and the definition of “LCJs” should be agreed before the issue of political commitment is taken up.

← 7.  Note by India: India records its reservation on the design elements of the pricing methodology, including but not limited to, the exclusion of goodwill from the intangible fixed assets for calculating net operating assets of a tested party, the wide deviation range of +/-0.5% vis-à-vis the median that has been allowed for each cell of the pricing matrix, the design of pricing matrix through use of a single commercial database that has not yielded a geographically representative dataset, the appropriateness of the filtering criteria, the factor used in matrix and their categorisation.

← 8.  Note by India: India expresses its in-principal objection to the use of an operating expense based metric as a cross-check to cap (or collar) the return of the distributors under Amount B. India considers that the value of a distributor’s functional contributions is reflected in the sales made by it, and not in the operating expense of the distributor. India also believes that the cross-check could adversely affect lower income countries, where it considers that the operating expense of similarly placed distributors is systemically lower than in high income countries, and that the alternative cap rates may not sufficiently address this issue.

← 9.  In the context of designing Amount B, the Inclusive Framework has explored several mechanisms to address geographical differences as reflected in the consultation documents of December 2022 and July 2023.

← 10.  Note by India: India expresses its objection to non-inclusion of an appropriate definition of ‘qualifying jurisdictions’ for section 5.2 and section 5.3, and to the proposal to incorporate the same at a later date.

← 11.  Note by India: India records its reservation on the proposal to develop a framework to gather information on the practical application of Amount B as no further details in respect of such framework have been provided. India also has concerns around the resource-intensive nature of any such exercise, especially from the point of view of capacity constrained jurisdictions.