Pillar One - Amount B

Appendix B – Illustrative examples

The assumptions in the following numerical examples are intended for illustrative purposes only and should not be taken as prescribing adjustments and arm’s length arrangements in actual cases or particular industries.

While the examples seek to illustrate the interplay of the different components of the pricing methodology in section 5, the simplified and streamlined approach must be applied in each case according to the specific facts and circumstances.

The illustrative examples use the midpoint for the adjustment under section 5.1, but any point within a range equal to the return on sales percentage derived from the pricing matrix (Table 5.1) plus or minus 0.5% can be relied upon for the purpose of demonstrating compliance with section 5.1.

1. The following 8 examples show how to calculate the return on sales of a tested party in scope of the simplified and streamlined approach. It assumes that the jurisdictions involved in the illustrations have implemented the simplified and streamlined approach, and that the tested party meets the scoping criteria, with no exclusions being applicable. Balance sheet items in the examples are calculated on an average basis in accordance with footnote 4 of the guidance.

Example 1 – Basic fact pattern with the industry Group 1 and the factor intensity classification [C]

2. Assume that GROUP AB is an MNE group that manufactures and distributes household consumables. Company A is the parent company of the group, resident in Country A. Company B is a subsidiary of GROUP AB resident in Country B that undertakes wholesale distribution activities in Country B.

3. Company A sells household consumables to Company B, who then sells the products, without further modifications, to third party retailers in Country B. Unless indicated otherwise in the examples, Country B is not a qualifying jurisdiction within the meaning of sections 5.2 and 5.3.

4. Assume Company B shows the following figures (before the calculation of the return under the simplified and streamlined approach):

a) Profit & loss of Company B in Year X-3 through Year X

 

		Year X-3	Year X-2	Year X-1	Year X
(a)	Sales	199	195	205	200
(b)	Cost of goods sold (COGS)	(145)	(142)	(154)	(144)
(c)= (a) + (b)	Gross profit	54	53	51	56
(d)	Operating expenses	(50)	(47)	(46)	(49)
(e)= (c) +(d)	Earnings Before Interest & Tax (EBIT)	4	6	5	7
(f) = (e) / (a)	Return on Sales (%)	2.01%	3.08%	2.44%	3.50%
(g) = (e) / (d)	Return on Operating Expense	8.00%	12.77%	10.87%	14.29%

b) Balance sheet items of Company B calculated on an average basis for Year X-3 through Year X-1

 

	Year X-3	Year X-2	Year X-1	Year X
Assets:
Fixed assets	50	42	40
Debtors	30	22	26
Stock	25	18	25
Liabilities:
Creditors	33	34	36

5. In order to determine the return of Company B in Year X under the simplified and streamlined approach, the following steps should be undertaken:

• Step 1 – Determine the relevant industry grouping of the tested party.

  • Company B falls into Group 1 of the industry groupings in the definitions section of the guidance.

• Step 2 – Determine the relevant factor intensity classification.

  • As illustrated in the following tables, the net operating asset intensity of Company B calculated based on a weighted average of the preceding three-year period (from Year X-3 to Year X-1) is 29.22%, and the operating expenses intensity for the same period is 23.87%. Therefore, under the pricing matrix in section 5.1, the factor intensity classification of Company B is [C].

  • The account payable guardrail of 90 days under footnotes 5 and 29 of the guidance is not triggered as calculated in c).

  c) Calculation of Accounts Payable guardrail

 

		Year X-3	Year X-2	Year X-1	Year X
(a)	Creditors	33	34	36
(b)	COGS	145	142	154
(c)= (a) / (b)	Ratio of Creditors to COGS	0.23	0.24	0.23
(d)= (c) x 365	Accounts payable days	83.07	87.39	85.32
(e)	Meet 90 days threshold	Yes	Yes	Yes

d) Calculation of working capital in Year X-3 through Year X-1

 

		Year X-3	Year X-2	Year X-1	Year X
(a)	Stock	25	18	25
(b)	Debtors	30	22	26
(c)	Creditors	33	34	36
(d)=(a)+(b)-(c)	Working capital	22	6	15

e) Calculation of net operating assets intensity (OAS)

Net Operating assets

 

		Year X-3	Year X-2	Year X-1	Year X
(a)	Fixed assets	50	42	40
(b)	Working capital	22	6	15
(c)=(a)+(b)	Net Operating assets	72	48	55

Net operating assets intensity (OAS)

 

		Year X-3	Year X-2	Year X-1	3-year weighted average
(a)	Sales	199	195	205	599
(b)	Net Operating assets	72	48	55	175
(c)=(b)/(a)	OAS%				29.22%

f) Calculation of operating expense intensity (OES)

 

		Year X-3	Year X-2	Year X-1	3-year weighted average
(a)	Sales	199	195	205	599
(b)	Operating expenses	50	47	46	143
(c)=(b)/(a)	OES%				23.87%

• Step 3 –Identify and apply the range from the relevant matrix segment.

  Under the pricing matrix in section 5.1 the return of Company B in year X should be 2.5% (+/- 0.5%).

• Step 4 – Apply the operating expense cross-check of section 5.2.

  The operating expense cross-check described in section 5.2 is not triggered because the equivalent return on operating expenses result (10.20%) is within the operating expense cap-and-collar range (10%-60%).

• Step 5 – Apply data availability mechanism of section 5.3.

  Data availability mechanism described in Section 5.3 is not triggered because Country B is not a qualifying jurisdiction.

6. The table below illustrates the calculation of the operating margin of the tested party under the streamlined and simplified approach.

 

Year X
		P&L (before Section 5 calculation)	P&L (after Section 5 calculation)
(a)	Sales	200	200
(b)	Cost of Goods Sold	(144)	(146)
(c)= (a) + (b)	Gross profit	56	54
(d)	Operating expenses	(49)	(49)
(e)= (c) + (d)	Earnings Before Interest & Tax (EBIT)	7	5
(f)= (e) / (a)	Return on Sales (%)	3.5%
(g)= (e) / (d)	Return on Opex	14.29%
(h)	RoS% under Section 5.1		2.5%
(i)= (a) x (h)	EBIT under Section 5.1		5
(j)= (i) / (d)	Equivalent return on OPEX		10.20%

Example 2 – Basic fact pattern with the industry Group 3 and the factor intensity classification [D]

7. The facts are the same as in Example 1 except the figures of the profit & loss and balance sheet items calculated on an average basis of Company B in Year X-3 through Year X have changed as follows, and the MNE group produces and sells medical machinery.

a) Profit & loss of Company B in Year X-3 through Year X

 

		Year X-3	Year X-2	Year X-1	Year X
(a)	Sales	199	195	205	200
(b)	Cost of goods sold (COGS)	(156)	(163)	(164)	(156)
(c)= (a) + (b)	Gross profit	43	32	41	44
(d)	Operating expenses	(37)	(26)	(33)	(36)
(e)= (c) + (d)	Earnings Before Interest & Tax (EBIT)	6	6	8	8
(f) = (e) / (a)	Return on Sales (%)	3.02%	3.08%	3.90%	4.00%
(g) = (e) / (d)	Return on Operating Expense	16.22%	23.08%	24.24%	22.22%

b) Balance sheet items of Company B calculated on an average basis for Year X-3 through Year X-1

 

	Year X-3	Year X-2	Year X-1	Year X
Assets:
Fixed assets	26	28	22
Debtors	15	18	22
Stock	20	16	20
Liabilities:
Creditors	33	36	35

8. In order to determine the return of Company B in Year X under the simplified and streamlined approach, the following steps should be undertaken:

• Step 1 and Step 2 – Company B falls into Group 3 of the industry groupings and the factor intensity classification of Company B is [D] as illustrated in the table c). The account payable guardrail of 90 days under footnotes 5 and 29 of the guidance is not triggered.

  c) Working capital, Net operating assets, OAS% and OES%

 

	Year X-3	Year X-2	Year X-1	3-year weighted average
Working capital	2	(2)	7	-
Net Operating assets	28	26	29	-
OAS%	-	-	-	13.86%
OES%	-	-	-	16.03%

• Step 3 – Step 5 – Under the pricing matrix in section 5.1, the return of Company B in year X should be 3 % (+/- 0.5%). The operating expense cross-check described in section 5.2 is not triggered because the equivalent return on operating expenses result (16.67%) is within the operating expense cap-and-collar range (10%-40%), and Data availability mechanism described in Section 5.3 is not triggered because Country B is not a qualifying jurisdiction.

9. The table below illustrates the calculation of the operating margin of the tested party under the streamlined and simplified approach.

 

Year X
		P&L (before Section 5 calculation)	P&L (after Section 5 calculation)
(a)	Sales	200	200
(b)	Cost of Goods Sold	(156)	(158)
(c)= (a) + (b)	Gross profit	44	42.00
(d)	Operating expenses	(36)	(36)
(e)= (c) + (d)	Earnings Before Interest & Tax (EBIT)	8	6
(f)= (e) / (a)	Return on Sales (%)	4.00%
(g)= (e) / (d)	Return on Opex	22.22%
(h)	RoS% under Section 5.1		3.00%
(i)= (a) x (h)	EBIT under Section 5.1		6.00
(j)= (i) / (d)	Equivalent return on OPEX		16.67%

Example 3 – Application of the Data availability mechanism for qualifying jurisdictions

10. The facts are the same as in Example 2 except that Country B is a qualifying jurisdiction within the meaning of sections 5.2 (operating expense cross-check) and 5.3 (the data availability mechanism) and has a sovereign credit rating for the relevant fiscal year of BB-.

11. As in Example 2, the operating expense cross-check described in section 5.2 is not triggered because the equivalent return on operating expenses result (16.67%) is within the operating expense cap-and-collar range (10%-45%).

12. In accordance with the data availability mechanism, Company B will earn an adjusted return in accordance with the following formula:

Adjusted return on sales = ROS^TP + (NRA^J x OAS^TP)

13. ROS^TP is 3% (the return on sales percentage of the tested party calculated in accordance with Sections 5.1 and 5.2 where applicable), NRA^J is 1.8% (the net risk adjustment percentage of a jurisdiction with the sovereign credit rating with BB-) and OAS^TP is 13.86% 1(the net operating asset intensity percentage of Company B based on weighted average of year X-3 to X-1). The table below illustrates adjusted return on sales for Company B after application of the data availability mechanism.

 

Year X
(a)	RoS% under Section 5.1	3%
(b)	Net Risk Adjustment%	1.80%
(c)	OAS%	13.86%
(d)= (a) + ((b) x (c))	Adjusted RoS% under Section 5.3	3.25%

Example 4 – Opex cross-check cap is triggered

14. The facts are the same as in Example 2 except the figures of the profit & loss in Year X-3 through Year X and balance sheet items calculated on an average basis of Company B in Year X-3 through Year X-1 have changed as follows, and the MNE group produces and sells consumer electronics:

a) Profit & loss of Company B in Year X-3 through Year X

 

		Year X-3	Year X-2	Year X-1	Year X
(a)	Sales	199	195	205	200
(b)	Cost of goods sold (COGS)	(181)	(178)	(187)	(182)
(c)= (a) + (b)	Gross profit	18	17	18	18
(d)	Operating expenses	(11)	(11)	(11)	(10)
(e)= (c) +(d)	Earnings Before Interest & Tax (EBIT)	7	6	7	8
(f) = (e) / (a)	Return on Sales (%)	3.52%	3.08%	3.41%	4.00%
(g) = (e) / (d)	Return on Operating Expense	63.64%	54.55%	63.64%	80.00%

b) Balance sheet items of Company B calculated on an average basis for Year X-3 through Year X-1

 

	Year X-3	Year X-2	Year X-1	Year X
Assets:
Fixed assets	48	42	45
Debtors	31	37	33
Stock	20	16	20
Liabilities:
Creditors	33	36	35

15. In order to determine the return of Company B in Year X under the simplified and streamlined approach, the following steps should be undertaken:

• Step 1 and Step 2 – Company B falls into Group 2 of the industry groupings and the factor intensity classification of Company B is [B] as illustrated in the table c). The account payable guardrail of 90 days under footnotes 5 and 29 of the guidance is not triggered.

  c) Working capital, Net operating assets, OAS% and OES%

 

	Year X-3	Year X-2	Year X-1	3-year weighted average
Working capital	18	17	18	-
Net Operating assets	66	59	63	-
OAS%	-	-	-	31.39%
OES%	-	-	-	5.51%

• Step 3 – Under the pricing matrix in Section 5.1, the return of Company B in year X should be 3.75 % (+/- 0.5%).

• Step 4 – The operating expense cross-check described in Section 5.2 is triggered because the equivalent return on operating expenses result (75.00%) exceeds the operating expense cap-and-collar range (10%-60%). Since the equivalent return on operating expenses exceeds the range, the return on sales of Company B will be adjusted downwards until it results in the equivalent return on operating expenses equal to the operating expense cap. The return on sales after the adjustment is 3.00%.

• Step 5 – Data availability mechanism described in Section 5.3 is not triggered because Country B is not a qualifying jurisdiction.

16. The table below illustrates the calculation of the operating margin of the tested party under the streamlined and simplified approach.

 

Year X
		P&L (before Section 5 calculation)	P&L (after Section 5.1 calculation)	P&L (after Section 5.2 calculation)
(a)	Sales	200	200	200
(b)	Cost of Goods Sold	(182)	(182.5)	(184)
(c)= (a) + (b)	Gross profit	18	17.5	16
(d)	Operating expenses	(10)	(10)	(10)
(e)= (c) + (d)	Earnings Before Interest & Tax (EBIT)	8	7.5	6
(f)= (e) / (a)	Return on Sales (%)	4.00%
(g)= (e) / (d)	Return on OPEX	80.00%
(h)	RoS% under Section 5.1		3.75%
(i)= (a) x (h)	EBIT under Section 5.1		7.5
(j)= (i) / (d)	Equivalent return on OPEX		75.00%
(k)= (d) x 60%	Adjusted EBIT under Section 5.2			6
(l)= (k) / (a)	Adj. Return on Sales (%) under Section 5.2			3.00%

Example 5 - Application of the Opex cross-check and Data availability mechanism

17. The facts are the same as in Example 4 except Country B is a qualifying jurisdiction within the meaning of Sections 5.2 (operating expense cross-check) and 5.3 (the data availability mechanism) and has a sovereign credit rating for the relevant fiscal year of B-.

18. As in Example 4, the operating expense cross-check described in Section 5.2 is triggered because the equivalent return on operating expenses result (75.00%) exceeds the operating expense cap-and-collar range (10%-70%). Since the equivalent return on operating expenses exceeds the range, the return on sales of Company B will be adjusted downwards until it results in the equivalent return on operating expenses equal to the operating expense cap. The return on sales after the adjustment is 3.50%.

19. In accordance with the data availability mechanism, Company B will earn an adjusted return in accordance with the following formula:

Adjusted return on sales = ROS^TP + (NRA^J x OAS^TP)

20. ROS^TP is 3.50% (the return on sales after an adjustment based on Section 5.2), NRA^J is 4.9% (the net risk adjustment percentage of a jurisdiction with the sovereign credit rating with B-) and OAS^TP is 31.39% 2(the net operating asset intensity percentage of the Company B based on weighted average of year X-3 to X-1). The table below illustrates adjusted return on sales for Company B after application of the data availability mechanism.

 

Year X
(a)	RoS% under Section 5.1 and 5.2	3.50%
(b)	Net Risk Adjustment%	4.90%
(c)	OAS%	31.39%
(d)= (a) + ((b) x (c))	Adjusted RoS% under Section 5.3	5.04%

Example 6 – NOA accounts payable days guardrail is exceeded

21. The facts are the same as in Example 4 except the figures of the profit & loss and balance sheet items calculated on an average basis of Company B in Year X-3 through Year X-1 have changed as follows and the account payable guardrail of 90 days under footnotes 5 and 29 of the guidance is exceeded.

a) Profit & loss of Company B in Year X-3 through Year X

 

		Year X-3	Year X-2	Year X-1	Year X
(a)	Sales	199	185	195	200
(b)	Cost of goods sold (COGS)	(181)	(168)	(177)	(182)
(c)= (a) + (b)	Gross profit	18	17	18	18
(d)	Operating expenses	(11)	(11)	(11)	(10)
(e)= (c) +(d)	Earnings Before Interest & Tax (EBIT)	7	6	7	8
(f) = (e) / (a)	Return on Sales (%)	3.52%	3.24%	3.59%	4.00%

b) balance sheet items of Company B calculated on an average basis for Year X-3 through Year X-1

 

	Year X-3	Year X-2	Year X-1	Year X
Assets:
Fixed assets	48	42	45
Debtors	31	39	39
Stock	36	28	20
Liabilities:
Creditors	65	65	55

22. In order to determine the return of Company B in Year X under the simplified and streamlined approach, the following steps should be undertaken:

• Step 1 – Company B falls into Group 2 of the industry groupings in the definitions section of the guidance.

• Step 2 – the factor intensity classification of Company B is [B] as illustrated in the table e). Since the account payable guardrail of 90 days under footnotes 5 and 29 of the guidance applies and creditors are adjusted, working capital and net operating assets intensity (OAS) should be calculated with the adjusted creditors.

  c) Calculation of Accounts Payable guardrail

 

		Year X-3	Year X-2	Year X-1	Year X
(a)	Creditors	65	65	55
(b)	Cost of Goods Sold	181	168	177
(c)= (a) / (b)	Ratio of Creditors to COGS	0.36	0.39	0.31
(d)= (c) x 365	Accounts payable days	131.08	141.22	113.42
(e)	Meet 90-day threshold	No	No	No
(f)= [(b) / 365] x 90	Adj. creditors	44.63	41.42	43.64
(g)= (f) / (b)	Adj. ratio of Creditors to COGS	0.25	0.25	0.25
(h)= (g) x 365	Adj. accounts payable days	90 days	90 days	90 days

d) Adjusted Balance sheet items of Company B calculated on an average basis as a result of Accounts Payable guardrail

 

	Year X-3	Year X-2	Year X-1	Year X
Assets:
Fixed assets	48	42	45
Debtors	31	39	39
Stock	36	28	20
Liabilities:
Creditors	44.63	41.42	43.64

e) Working capital and Net operating asset, OAS% and OES%

 

	Year X-3	Year X-2	Year X-1	3-year weighted average
Working capital with adjusted creditors	22.37	25.58	15.36	-
Net Operating assets with adjusted creditors	70.37	67.58	60.36	-
Unadjusted OAS%	-	-	-	24.70%
Adjusted OAS%	-	-	-	34.25%
OES%	-	-	-	5.70%

• Step 3 – Under the pricing matrix in Section 5.1 the return of Company B in year X should be 3.75 % (+/- 0.5%).

• Step 4 – The operating expense cross-check described in Section 5.2 is triggered because the equivalent return on operating expenses result (75.00%) exceeds the operating expense cap-and-collar range (10%-60%). Since the equivalent return on operating expenses exceeds the range, the return on sales of Company B will be adjusted downwards until it results in the equivalent return on operating expenses equal to the operating expense cap. The return on sales after the adjustment is 3.0%.

• Step 5 – Data availability mechanism described in Section 5.3 is not triggered because Country B is not a qualifying jurisdiction.

The table below illustrates the calculation of the operating margin of the tested party under the streamlined and simplified approach.

 

Year X
		P&L (before Section 5 calculation)	P&L (after Section 5.1 calculation)	P&L (after Section 5.2 calculation)
(a)	Sales	200	200	200
(b)	Cost of Goods Sold	(182)	(182.5)	(184)
(c)= (a) + (b)	Gross profit	18	17.5	16
(d)	Operating expenses	(10)	(10)	(10)
(e)= (c) + (d)	Earnings Before Interest & Tax (EBIT)	8	7.5	6
(f)= (e) / (a)	Return on Sales (%)	4.0%
(g)= (e) / (d)	Return on OPEX	80.00%
(h)	RoS% under Section 5.1		3.75%
(i)= (a) x (h)	EBIT under Section 5.1		7.5
(j)= (i) / (d)	Equivalent return on OPEX		75.00%
(k)= (d) x 60%	Adjusted EBIT under Section 5.2			6
(l)= (k) / (a)	Adj. Return on Sales (%) under Section 5.2			3.00%

Example 7 – Multiple industry grouping where de minimis threshold of 20% of sales is exceeded

23. The facts are the same as in Example 1 except the MNE group produces and sells both household consumables and electrical components and consumables, and in year X, Company B earns 60% of sales from selling household consumables and 40% of sales from selling electrical components and consumables.

24. Since Company B sells goods falling in to more than one industry group (household consumables in industry group 1 and electrical components and consumables in industry group 2) and the de minimis threshold of 20% of sales is exceeded for both industry groupings, calculation of a weighted average return is required as the table below illustrates.

Profit & loss extract of Company B in Year X

 

Year X segmented P&L
	Total	industry group 1 Category [C]	industry group 2 category [C]
Sales	200	120	80
Shares in total sales		60%	40%
RoS% under Section 5.1	(60% x 2.50%) + (40% x 3.00%) = 2.70% (+/- 0.5%)

Example 8 – Multiple industry grouping where de minimis threshold of 20% of sales is not met.

25. The facts are same as in example 7 except that in year X, Company B earns 93% of sales from selling household consumables and 7% of sales from selling electrical components and consumables.

26. Although Company B sells goods falling in to more than one industry group (household consumables in industry group 1 and electrical components and consumables in industry group 2), calculation of a weighted average return is not required because the de minimis threshold of 20% of sales is not met for industry grouping 2.

Profit & loss extract of Company B in Year X

 

Year X segmented P&L
	Total	industry group 1 Category [C]	Industry group 2 category [C]
Sales	200	186	14
Share in total sales		93%	7%
RoS% under Section 5.1	100% x 2.50% = 2.50% (+/- 0.5%)

Notes

← 1.  Net operating asset guardrail of 85% under Section 5.3 is not exceeded.

← 2.  Net operating asset guardrail of 85% under Section 5.3 is not exceeded.