In more detail
Amongst the areas that required further work, the February 2024 guidelines included the following three key outstanding points:
- The list of jurisdictions within scope of the political commitment on Amount B, initially called "low-capacity jurisdictions" and now referred to as "covered jurisdictions"
- The definitions of qualifying jurisdictions for the application of the special cap rates for the operating expense crosscheck mechanism (Section 5.2) and the data availability mechanism adjustment (Section 5.3)
- 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 additional OECD guidance issued on 17 June 2024 only covers the first two outstanding items. The third point, i.e. the additional optional qualitative scoping criterion, presumably remains in the works. While the OECD acknowledges ongoing work on the Pillar One package, including the Amount B framework, it has not provided a specific timeline for finalising this remaining aspect. Further, it is also not entirely clear if Amount B will remain optional or whether the OECD is still working on a concept for mandatory application.
Covered jurisdictions
The additional guidance introduces a new, more neutral term to refer to jurisdictions covered by the Inclusive Framework (“IF”) members' commitment to respect outcomes under the simplified and streamlined approach, i.e. Amount B, for in-scope transactions. In the February 2024 report, those jurisdictions were referred to as low-capacity jurisdictions. Now, the term coined by the additional guidance refers to covered jurisdictions, to avoid any suggestion that the jurisdictions covered by the commitment are necessarily low-capacity jurisdictions.
The list of covered jurisdictions encompasses 66 low- and middle-income jurisdictions, with a notable representation from African, Middle Eastern and smaller Asian economies. It also includes some larger developing economies, such as Brazil, Mexico, Argentina, Nigeria and Thailand.
The list of covered jurisdictions does not imply that such jurisdictions are obligated to adopt or will adopt the simplified and streamlined approach. However, the additional guidance report states that, prior to March 2024, Argentina, Brazil, Costa Rica, Mexico and South Africa already expressed their willingness to apply Amount B and so should be treated as covered jurisdictions if not already included.
The list of covered jurisdictions will be reviewed every five years with the first revision expected to occur on 31 December 2029. Some IF members have indicated they may review their political stance on their commitment before agreeing to re-extend after the five-year period, for example, if certain covered jurisdictions are not signatories of the Amount A MLC by the end of 2025. Moreover, Türkiye has noted that its political commitment includes only covered jurisdictions with which there is a bilateral tax treaty in place. It is noteworthy that non-IF members that are low- or middle-income jurisdictions using the World Bank Group country classifications by income level, may be added to the list of covered jurisdictions if they express a willingness to apply Amount B.
Qualifying jurisdictions
The definition of qualifying jurisdiction for Section 5.2 relates to the application of the operating expense crosscheck, upon which a higher set of operating expense cap rates apply for transactions involving those qualifying jurisdictions. The list of qualifying jurisdictions to which such higher cap rates apply include 132 jurisdictions that are classified by the World Bank Group as low income, lower-middle income and upper-middle income. Jurisdictions like Brazil, China, Mexico and Türkiye feature in this list.
The definition of qualifying jurisdiction for Section 5.3 relates to the data availability mechanism that provides for an upward adjustment to the returns derived from the pricing matrix when the tested party is located in a qualifying jurisdiction. The size of the adjustment is a function of the sovereign credit rating of such qualifying jurisdiction and the asset intensity level of the tested party. The list of qualifying jurisdictions to which such adjustment applies covers 135 jurisdictions and relates to jurisdictions that have a limited representation in the global set with less than five comparables and for which a sovereign credit rating is available. While there is some overlap, the lists of qualifying jurisdictions under Sections 5.2 and 5.3 are not identical.
Further implications
One potential area of uncertainty arises when a jurisdiction is classified as a qualifying jurisdiction for either Section 5.2 (operating expense crosscheck) or Section 5.3 (data availability adjustment) of the Amount B guidance, but it is not included in the list of covered jurisdictions. This applies to China, Colombia, India and Türkiye, for example. In these cases, while the guidance endorses specific considerations when determining the Amount B return for tested parties located in these jurisdictions, the fact that these jurisdictions do not feature in the list of covered jurisdictions excludes them from the explicit commitment by IF members to respect the outcomes of Amount B. This ambiguity could lead to potential double taxation and may require further clarification. The optionality of Amount B adds to the potential for double taxation and reduces the tax certainty Amount B was supposed to create. It remains to be seen if the OECD will address this in future guidance.
