As a reminder, Amount B was introduced as a "fixed return" on "baseline marketing and distribution activities" in the October 2020 Blueprint of Pillar One, and was seen as a critical component of the Pillar One proposal. While during the following two-and-a-half years, the focus of the OECD IF members had been on Amount A, the international tax community has been waiting for the detailed design of the proposed “fixed return”, commonly referred to as Amount B. Though the OECD IF released two consultation documents in late 2022 and mid-2023 respectively, and now the Additional Guidance 2024, there is still no final consensus on the exact outline and applicability of the Amount B guidance.

In this alert we highlight the key take-aways from the Additional Guidance 2024 and lay out what these proposed changes may mean for your current transfer pricing positions covering the baseline marketing and distribution activities in your operating model.

Key takeaways

• Final guidance still needs to be issued and implementation is delayed to January 2025: The OECD IF had anticipated to release a final Amount B report by year-end 2023, followed by a new updated edition of the OECD Transfer Pricing Guidelines in January 2024, incorporating key elements of Amount B. While the Additional Guidance 2024 has been published, some elements are still pending finalization and the OECD IF now intends to conclude the work on Amount B by 31 March 2024, with the proposals to be included in the OECD Transfer Pricing  Guidelines. This development has effectively delayed the effective date by one year, from January 2024 to January 2025.
• Amount B seems to have lost its original rationale: It appears that Amount B will no longer be known as “Amount B”, but rather as an optional simplified and streamlined approach. It is also no longer proposed that Amount B will be mandatory for OECD IF members to apply. Instead the regime will be entirely optional. While, members of the IF commit to respect the outcome determined under the simplified and streamlined approach where such approach is applied by a low-capacity jurisdiction, a term that has yet to be defined, given the optional and elective nature it is difficult to see how this approach will lead to an increase in simplicity and a reduction in tax disputes.

In more detail

• Application to all, not so much anymore: Unlike Pillar One’s Amount A, which is estimated to apply to approximately 100 of the largest most profitable multinationals globally, it was expected that Amount B would apply to a much larger base of taxpayers. However, the current guidance leaves the choice up to each jurisdiction – with a focus on low-capacity jurisdictions – to decide whether to apply the simplified and streamlined approach. However, even in jurisdictions that choose to apply the simplified and streamlined approach, the current guidance now proposes two options: 
  • Jurisdictions may allow tested parties to elect to apply the simplified and streamlined approach in an optional manner.
  • Jurisdictions may require the application of the simplified and streamlined approach in a prescriptive manner for tested parties resident in their jurisdiction and for their competent authorities. 
• Jurisdictions are also able to determine their threshold for the operating expenses to sales ratio criterion for Amount B. The lower limit retains the 3% threshold from the July 2023 consultation document. However, the upper limit has decreased to be between 20% and 30%, as determined by each jurisdiction that implements Amount B, further decreasing the potential in-scope tested parties. 
• Simplified approach? Not really!: It is important to note here that paragraph 6 of the Additional Guidance 2024 indicates that the jurisdiction’s choice is not-binding on the treaty counterparties, and chapter 8 reinforces the non-binding application of Amount B during a tax dispute, (e.g., MAP), stating that “taxpayers, on filing a MAP”, when not all jurisdictions have applied Amount B, “should base any justification of their position only on the remainder of these guidelines”. This will likely lead to additional practical complexity, which was not intended under the original design of Amount B. 
• No final consensus yet on key provisions: The OECD IF has not yet been able to release the final set of rules that will govern Amount B. The additional guidance reveals that there is still outstanding work pending on:
  • The definition(s) of “low-capacity jurisdictions” and “qualifying jurisdictions”.
  • The various aspects of the Amount B design, including monitoring the analyses to validate the efficacy of the proposed approach, the development of competent authority agreements that could be used within the context of bilateral tax treaty relationships and the overall design of the pricing methodology”.
  • The OECD IF is still working on "an additional optional qualitative scoping criterion that jurisdictions may choose to apply" as an additional step in identifying distributors as in-scope or out-of-scope.
• Digital goods and services are fully out of scope: The previous publications had left the door slightly ajar to the possibility of having digital goods and services be part of Amount B. It looks like the OECD has now made a final decision: only the distribution and marketing of tangible goods is in scope – the supply of digital and other non-tangible goods is out of scope, as are services. Distribution of commodities is also out of scope.    
• Scope of transactions: The two types of intragroup transactions intended to be in scope of Amount B include:
  • Buy-sell arrangements with respect to (finished or unfinished) goods for wholesale distribution to unrelated parties.
  • Sales agency and commissionaire arrangements contributing to one or more associated enterprises' wholesale distribution of goods to unrelated parties.
• Retail activities, unless they fall within the threshold of not exceeding 20% of total annual sales of the distributor, remain out of scope of Amount B.
• Methodology: The proposed pricing methodology is based on the application of the transactional net margin method (TNMM), considering a global pool of companies involved in baseline marketing and distribution activities. However, there is an exception "where the CUP method using internal comparables can be reliably applied and the necessary information is readily available to tax administrations and taxpayers”. 
• Pricing matrix: The financial information derived from the global dataset was used as the basis for the approximation of arm’s length results and presented in the form of a pricing matrix, using a return on sales as the relevant net profit indicator.
• The pricing matrix presented by the OECD IF takes into account three factors to establish the arm’s length pricing outcomes for in-scope transactions:
  • (i) the operating asset to sales intensity (OAS) of the tested party.
  • (ii) the operating expense to sales intensity (OES) of the tested party. 
  • (iii) the industry in which the tested party operates.
• The one-size-fits-all Berry ratio cap-and-collar check has been replaced by a return on operating expense cap-and-collar with ranges that vary based on the factor intensities of the tested party. 
• The pricing matrix and cap-and-collar ranges will be updated every five years, with an annual review of the data from the global dataset to determine if any particular circumstances would warrant a more frequent update.
• Documentation: The documentation approach for in-scope transactions builds on the premise that the current content of the Master File and Local File already includes the items of information and documents which are relevant to examine the taxpayer’s position. However, when the taxpayer first applies the simplified and streamlined approach, it should include in its Local File or any other documentation relevant to the application of the approach “a consent to apply the approach for a minimum of three years”.  An intercompany agreement is not required, although the guidance suggests that "a written contract would ease the administration of the simplified and streamlined approach…".
• Dispute resolution: The additional guidance proposes that taxpayers should apply for a MAP in case of any tax disputes arising out of Amount B. However, as Amount B is non-binding on counter-party jurisdictions that do not opt to apply Amount B, it is not guaranteed that the simplified and streamlined approach will be treated as an acceptable outcome.

Outlook

Additional guidance is expected to be available by 31 March 2024, in particular on the definition of the terms "low-capacity jurisdictions” and “qualifying jurisdictions”. The fact that both terms have not been defined yet led to India expressing its reservation on the incomplete nature of the guidance. Further, the additional qualitative scoping criteria first mentioned in the 2023 Public Consultation Document is still outstanding as well and might further narrow the scope of the simplified and streamlined approach.

Given the scope narrowing and the voluntary nature of the simplified and streamlined approach, the Additional Guidance 2024 does not appear to further its intended goal, which is to streamline the process for transfer pricing baseline marketing and distribution activities in accordance with the arm's length principle with the clear aim to enhance tax certainty and reduce resource-intensive disputes between taxpayers and tax administrations. It remains to be seen if future guidance will be carried by this goal.

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*Trench Rossi Watanabe and Baker McKenzie have executed a strategic cooperation agreement for consulting on foreign law.