OECD Issues Second Consultation Document on Amount B

The OECD on July 17 released a second public consultation document seeking input on the plan to simplify the transfer pricing of baseline marketing and distribution activities, known as Amount B of Pillar One.

The consultation period will be open for comments through September 1. The OECD’s Inclusive Framework on Base Erosion and Profit Shifting plans to approve a final report on Amount B and incorporate key content into the OECD transfer pricing guidelines by January 2024.

The OECD issued a prior consultation document on Amount B on December 8, 2022. BDO provided comments on that document.

Scope

The consultation document, which does not represent the consensus views of the Inclusive Framework, discusses several open issues that are yet to be agreed upon.

One open issue centers on the scope of Amount B, that is, the determination of which distributors or distribution transactions will be subject to Amount B. The consultation document provides two alternative tests to identify transactions that are within scope, reflecting the differing opinions of the jurisdictions participating in the negotiations. 

Alternative A provides scoping rules that would apply without a qualitative criterion. The jurisdictions advocating for Alternative A take the position that a qualitative test would not improve the reliability of Amount B and would undermine the tax certainty objectives of the rules. Under this alternative, a transaction is within scope if:

• It exhibits economic characteristics that mean it can be reliably priced using a one-sided method, with the distributor being the tested party;
• The tested party in the qualifying transaction must not incur annual operating expenses lower than 3% and greater than 30% of its annual net sales;
• It does not involve the distribution of services or the marketing, trading or distribution of commodities; and
• The tested party does not perform non-distribution services (or other activities that could be reliably priced under another method).

The commentary provides three economically relevant characteristics of qualifying transactions that indicate a one-sided transfer pricing method may not be appropriate. The first is where there are unique and valuable contributions by each party to the transaction (including contributions of intangibles). The second is where the distributor and its counterparties perform functions, use assets and assume risks in the transaction with “such a degree of integration that their contributions cannot reliably be evaluation in isolation.” The third is where the distributor and its counterparties share the assumption of economically signification risks to the transaction.

Alternative B provides scoping rules that would apply with a qualitative criterion. The jurisdictions advocating for Alternative B take the position that without such a qualitative criterion, Amount B would not produce outcomes aligned with the arm’s length principle. Under this alternative, a transaction would be within scope if it meets the same four criteria outlined above, and the additional scoping criterion set out in Section 2.3.3 of the consultation document. Under this approach, transactions are removed from the scope of Amount B when the tested party makes non-baseline contributions to the controlled transactions. The commentary states that this type of transactions should be specifically identified and provides examples of the application of these rules. 

It is not clear yet which approach, if either, Amount B will use to identify transactions that are in scope. Additionally, jurisdictions may interpret the provisions differently. 

Pricing Framework for In-Scope Transactions

The consultation document also asks for stakeholder input on the pricing framework for Amount B. The current iteration of the rules relies on a global data set and uses a pricing matrix to determine the return on sales for in-scope transactions. To determine this return, Amount B provides a three-step process. 

First, the tested party must determine the correct industry grouping for the transactions. The framework provides three possible industry groupings, with examples of goods falling into each of the three industry groups. Further guidance on the goods that fall into these categories may be needed to delineate the differences between groupings. For example. Annex B of the consultation document lists Group 1 as including “household consumables,” but Group 2 also includes “home and office consumables.”

Second, the tested party must determine its relevant factor intensity classification from five possible classifications. The factor intensity classification refers to the different levels of net operating asset and operating expense intensity over the most recent three years.

Third, the tested party must identify and apply the arm’s length range from the pricing matrix. 

In addition to the pricing matrix, the pricing framework provides for different pricing matrices in a small number of countries with certain geographic differences, and for adjustments for risk based on operating jurisdictions’ sovereign credit rating category. There is also a provision whereby a distributor can use internal comparable uncontrolled prices (CUPs) rather than the Amount B pricing matrix when such CUPs are available.

Next Steps 

To continue the work on Amount B, the OECD consultation is open for comments through September 1. The Inclusive Framework plans to approve a final report on Amount B and incorporate key content into the OECD transfer pricing guidelines by January 2024.