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2024-05-16

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OECD releases the report on Pillar One Amount B

Background

On February 19, 2024, the OECD/G20 Inclusive Framework on BEPS released the report on Amount B of Pillar One. Amount B attempts to streamline and simplify the process of pricing baseline marketing and distribution activities in accordance with the arm’s length principle. The aim of this new approach is to enhance tax certainty, reduce resource-intensive disputes between taxpayers and tax administrations and in particular assist low-capacity jurisdictions to meet their needs.

Below, further information is included on (i) the scope, (ii) the pricing mechanism and, (iii) the timeline.

What is in scope?

Amount B focuses on the wholesale marketing and distribution of tangible goods. These arrangements need to be ‘baseline’ in order to fall in the scope of Amount B. The report, which will be added as an Annex to Chapter IV of the OECD Transfer Pricing Guidelines, describes specific criteria for transactions to qualify as baseline distribution.

Based on these criteria the following transactions are in scope of Amount B:

  • Buy-sell marketing and distribution transactions where the distributor purchases goods from one or more associated enterprises for wholesale distribution to unrelated parties; and
  • Sales agency and commissionaire transactions where the sales agent or commissionaire contributes to one or more associated enterprises’ wholesale distribution of goods to unrelated parties.

Qualifying transactions must subsequently meet further scoping criteria to ultimately be in scope for Amount B, including several qualitative criteria such as the ratio of operating expenses to net sales.

Transactions concerning the distribution of non-tangible goods, services and commodities are specifically out of scope for Amount B. In addition, the performance of (additional) non-distribution activities may limit the application of Amount B.

How are in scope transactions priced?

The in scope transactions are priced using a pricing matrix, which provides the applicable operating profit margin with a band of +/- 0.5 percent. The applicable operating profit margin is based on an ‘industry grouping’ and ‘factor intensity’.

The industry groupings are based on the levels of return expected in a specific industry and the factor intensity is based on specific ratios, consisting of operating assets to sales (OAS), and operating expenses to sales (OES).

What is the timeline?

Jurisdictions may choose to apply Amount B to local in scope distributors. When a jurisdiction chooses to apply Amount B, it may choose to implement it using two options:

  • Option 1 (“elective”): To permit taxpayers resident within the jurisdiction to elect to apply Amount B.
  • Option 2 (“prescriptive”): To require the use of Amount B in a prescriptive manner, where the scoping criteria are met.

Jurisdictions may choose to apply Amount B for fiscal years commencing on or after January 1, 2025.

Additional work is being undertaken on (i) additional optional qualitative scoping criteria and (ii) a list of low-capacity jurisdictions. The Inclusive Framework will conclude this work by March 31, 2024, with any additions to be incorporated into the OECD Transfer Pricing Guidelines.

Questions?

Would you like to know more about Amount B, or do you have any questions?

Please do not hesitate to contact our colleagues from our Transfer Pricing team.

Mick Willemsen

Senior associate

Edwin van de Stolpe

Associate
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