OECD Publishes Additional Amount B Guidance

The OECD/G20 Inclusive Framework on BEPS on June 17, 2024, released supplementary information regarding Amount B of Pillar One.

Background

The Amount B framework for pricing baseline marketing and distribution activities is a new approach that seeks to streamline and simplify the application of the arm’s length principle. This approach applies to all taxpayers regardless of size and profitability. A report on Amount B was approved and published by the Inclusive Framework on February 19, 2024, and incorporated as an annex to Chapter IV of the OECD Transfer Pricing Guidelines.

The February 2024 report was published pending completion of work on some outstanding administrative aspects of the guidance. The supplementary guidance released on June 17 completes the work on those sections of the report. It consists of two documents, one of which defines and identifies “covered jurisdictions” within the scope of the political commitment regarding Amount B. These jurisdictions are those for which jurisdictions have agreed that an Amount B determination of returns in a covered distribution transaction will be respected regardless of whether the counterparty to the transaction has adopted Amount B.  

A separate document addresses the definition and listing of jurisdictions determined to be “qualifying jurisdictions.” Qualifying jurisdictions are identified for two purposes: (1) a checking mechanism on the profit determined through the primary Amount B mechanism (Section 5.2 of the Amount B report), and (2) an adjustment to the profit determined through the primary Amount B mechanism for distributors in jurisdictions in which the global dataset of distributors does not provide sufficient coverage (Section 5.3 of the Amount B report).  

Covered Jurisdictions

Under the agreement reached by the Inclusive Framework, jurisdictions can choose to apply the simplified and streamlined approach to the qualifying transactions of their in-scope tested parties; however, the outcome determined under that approach by a jurisdiction that has chosen to apply it would not be binding on the counterparty jurisdiction if that counterparty has not adopted the approach. To address this, members of the Inclusive Framework committed to respect the outcome determined under the simplified and streamlined approach when the approach is applied by what was initially called a “low-capacity jurisdiction.” 

The Inclusive Framework originally said it would agree on the list of low-capacity jurisdictions by March 31, 2024; however, that deadline was not met. The first supplementary guidance document released on June 17 now addresses this. The term “low-capacity jurisdiction” has been replaced by “covered jurisdiction,” and includes certain low- and middle-income OECD and G-20 members.

The definition of covered jurisdictions is as follows: 

• Low- and middle-income Inclusive Framework jurisdictions as determined using the World Bank Group country classifications by income level, excluding EU, OECD, and G20 member countries. 
• Inclusive Framework jurisdictions that are OECD and G20 member states that otherwise meet the World Bank Group country determination as low- and middle-income, and that have expressed to the Inclusive Framework a willingness to apply Amount B.  Argentina, Brazil, Costa Rica, Mexico, and South Africa fall in this category.
• Any non-Inclusive Framework jurisdiction that meets the first criterion and expresses to the Inclusive Framework a willingness to apply Amount B will be added to the list of covered jurisdictions.

Qualifying Jurisdictions

The simplified and streamlined approach applies an operating expense cross-check as a guardrail for the primary return on sales net profit indicator. As part of this guardrail, a maximum or cap operating return-on-operating-expense (EBIT/Operating Expenses) ratio is specified, and if the actual ratio (as a result of the application of Amount B) exceeds that cap, the Amount B profit margin will be adjusted downward until the resulting return on operating expenses falls to the cap. This cross-check provides for both a default cap rate and an alternative higher cap rate, with the latter being applicable when the tested party is located in a “qualifying jurisdiction.”

The second supplementary guidance document released June 17 identifies the qualified jurisdictions for purposes of this operating expense cross-check cap and clarifies that Inclusive Framework members agreed that the term “qualifying jurisdiction” is not defined by reference to low-capacity. Rather, qualifying jurisdictions for purposes of the operating expense cross-check refers to jurisdictions that are classified by the World Bank Group as low income, lower-middle income, and upper-middle income based on the latest available World Bank Group country classifications.

This guidance document also provides a separate definition and enumeration of qualifying jurisdictions for the purpose of an adjustment mechanism to the profit determined through the primary Amount B mechanism. Specifically, the return on sales specified in the pricing matrix will be adjusted for distributors in jurisdictions for which the global dataset of distributors does not provide sufficient coverage (the “data availability mechanism” described in Section 5.3 of the Amount B report). 

In this context, the new guidance provides that a qualifying jurisdiction refers to jurisdictions with a publicly available long term sovereign credit rating of BBB+ (or equivalent) or lower from a recognized independent credit rating agency, and fewer than five local-country comparables in the global dataset. 

The lists of covered jurisdictions and the two types of qualified jurisdictions will be updated every five years and published on the OECD website.

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