On 17 July 2023 the Inclusive Framework issued a consultation document asking for stakeholder input on Amount B under Pillar One. Comments are invited by 1 September 2023.

Amount B applies to baseline marketing and distribution activities, which represent a large proportion of tax dispute cases. The rules relating to Amount B simplify the current transfer pricing rules for all taxpayers with transactions within the scope of the rules, such as buy/sell entities, commissionaires and sales agents. The proposed measures on Amount B set out a simplified and streamlined approach to applying the arm’s length principle to marketing and distribution activities.

There is an emphasis on the needs of countries with low administrative capacity that will need to implement these provisions in line with their available resources. Transfer pricing disputes often arise in developing country jurisdictions because there is an absence of local market comparables to use in a transfer pricing analysis. Some developing country jurisdictions estimate that transfer pricing disputes relating to distribution activities account for between 30% and 70% of all their transfer pricing disputes. By implementing Amount B they can reduce compliance and administrative costs and provide more tax certainty for the taxpayer.

Scope

Amount B applies to baseline distribution which does not involve unique and valuable intangibles or some economically significant risks. Also, multinationals often engage in different activities within the same legal entity and the calculation of Amount B permits the segmentation of the financial accounts, so Amount B can be applied specifically to the distribution functions. The performance of services is excluded from the scope of Amount B. Also, transactions involving the trading, marketing or distribution of commodities are excluded from the scope of the provisions.

There must be an appropriate balance between quantitative and qualitative metrics. In relation to scope, 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. In the document two alternative texts are outlined, Alternative A setting out text that could apply in the absence of a separate qualitative criterion; and Alternative B with text that could be applied if there is a separate qualitative criterion.

The consultation document emphasises that before applying the scoping criteria an accurate delineation of the qualifying transaction should be performed, taking into account all the comparability factors and the economically relevant characteristics of the transaction.

Pricing Framework

Transactions within the scope of Amount B are priced by reference to a pricing matrix unless internal comparable uncontrolled prices (CUPs) are available. The pricing matrix provides a grid of arm’s length returns on sales and the applicable return depends on features such as the distributor’s level of operating assets and operating expenses or on the industry in which the distributor operates. The pricing framework also addresses geographical differences and gaps in data availability.

There is a data availability mechanism for cases where there is insufficient data in the global dataset for a particular tested party jurisdiction but there is also evidence of country risk in that jurisdiction that could influence arm’s length returns on baseline marketing and distribution activities. Country risk may derive from the political or economic environment in which a business operates. The data availability mechanism recognises that a distributor operating in a high-risk jurisdiction is entitled to higher returns. The sovereign credit rating of the jurisdiction is used as an approximation to arrive at the relative difference in returns.