On 20 September 2023 the OECD published the responses to the consultation on Amount B of Pillar One of the two-pillar approach to taxation of the digital economy. Amount B applies to baseline marketing and distribution activities, simplifying the current transfer pricing rules for transactions involving buy/sell entities, commissionaires and sales agents. The consultation document looks at whether a separate qualitative scoping criterion is required to identify distributors making non-baseline contributions which cannot be reliably priced under the pricing methodology for Amount B. The text of Alternative A could apply in the absence of a separate qualitative criterion; and the text of Alternative B could be applied if there is a separate qualitative criterion.

The OECD received more than 70 responses from business, academic, trade and professional organisations to the consultation on Amount B covering issues such as the scope of the provisions and the extent to which they should be obligatory rather than acting as a safe harbour provision.

In their response the South Centre emphasised the extent of the problems faced by developing countries when dealing with the issues related to Amount B. The African Tax Administration Forum (ATAF) member countries report that 30% to 70% of their transfer pricing disputes relate to distribution activities, with the key issues being characterization of transactions and the lack of local market comparables. Their response noted that the need for simplification of rules could lead to non-baseline distribution functions being captured by the Amount B provisions, resulting in a lower return for higher-value functions and a loss of tax revenue for low-capacity jurisdictions (LCJs). Alternative B in the consultation paper tries to address this risk and would therefore be more beneficial for developing countries.

Business at OECD (BIAC), the business and industry advisory council, noted that under both Alternatives A and B the taxpayer must consider if a one-sided transfer pricing methodology is appropriate, by assessing the boundary between the profit split method and the transactional net margin method (TNMM). Then additional filters are applied to exclude entities from the scope of Amount B. BIAC considers that particularly the qualitative filters will significantly decrease the value of Amount B as it will reduce simplicity and tax certainty. BIAC considered that Amount B would function best as a safe harbour.

The Business Roundtable considered that Alternative A, which does not require a separate qualitative scoping criterion to identify and exclude non-baseline contributions, provides more tax certainty for business. The separate qualitative scoping criterion required under Alternative B would involve subjective judgments and therefore create uncertainty for taxpayers, increasing the number of transfer pricing disputes. The response from the Business Roundtable supported the application of the Amount B rules as a safe harbour, applying to the wholesale distribution of digital goods and to the marketing and distribution of services.

The response from the Chartered Institute of Taxation (CIOT) expressed concern about the resourcing burden for tax authorities. Various measures introduced in recent years through the BEPS project have increased the burden on tax authorities. The proposed Amount B rules would increase the burden on tax authorities that already struggle to maintain service levels and administer their domestic tax rules.

If the Amount B rules become mandatory CIOT noted that there are situations where the outcomes will be inappropriate because a business may be different from the business models envisaged by the pricing matrix. The mandatory application of Amount B would also create difficulties where there is no clear distinction between the baseline distributor and other functions or transactions, as there could be other transactions such as support services for the distributor in the cost base.

The CIOT response also emphasised that the scope of Amount B should include the baseline distribution of digital goods and services, as the effectiveness of Amount B would be reduced if the scope is too narrow. In particular low-capacity jurisdictions would be disadvantaged if the scope of Amount B is narrow, as they would lose a streamlined tool to establish an arm’s length result for the distribution of digital goods and services entering their markets.

The US Council for International Business (USCIB) considered that, to provide sufficient certainty for business, Amount B must be implemented as a safe harbour. USCIB also considered that the OECD has not provided sufficient transparency on the data forming the basis of the proposed design of Amount B. Fully transparent information should be made available and a further consultation should then be held to enable stakeholders to comment on the design.