On 8 December 2022 the OECD issued a consultation document and invited public comments on the main design elements of Amount B under Pillar One of the two-pillar approach to international tax. Comments were invited by 25 January 2023.
Amount B would provide a simplified approach to applying the arm’s length principle to baseline marketing and distribution activities. The document looks at the degree of simplification that is compatible with the OECD guidelines. Simplification measures such as safe harbours can increase the ability of tax administrations to administer the rules, which is especially important for countries with limited administrative capacity.
Amount B would apply to distributors in the case of buy-sell arrangements where the tested party purchases goods from associated enterprises resident in other jurisdictions and distributes them wholesale to unrelated parties in the local market; and would apply to sales agency and commissionaire arrangements where the tested party is involved in the wholesale distribution of goods for a related party, if the transaction exhibits certain economically relevant characteristics. The document outlines the economically relevant characteristics that are required for a controlled transaction to be within the scope of the rules. The taxpayer would need to consider the contractual terms, functional analysis, characteristics of the property distributed, economic circumstances and business strategies.
The Amount B pricing methodology will set out guidance on the benchmarking search criteria to be used in identifying a set of independent companies performing baseline marketing and distribution activities consistent with those of the taxpayer. The pricing methodology aims to set out an effective way of dealing with the challenges that often arise in pricing baseline marketing and distribution activities, for example those relating to the subjective nature of benchmarking practices, the risk of disputes, the limited availability of comparables in some markets, and capacity constraints within some tax administrations. The pricing methodology would require a search for comparables using standard benchmarking search criteria. Selection and analysis of independent comparables would take into account economically relevant characteristics.
Agreement on common benchmarking search criteria would lead to a standardised process to identify comparable entities, as a first step towards reducing the differences between the subjective approaches to benchmarking searches that can result in tax disputes.
Currently two options are under consideration for the output from the benchmarking search, these being a pricing matrix approach and a mechanical pricing tool approach. They would both use the same underlying benchmarking and technical analyses. The output from the common benchmarking search criteria could be set out in the form of a matrix of arm’s length pricing outcomes, where comparable marketing and distribution entities would be arranged in subsets based on their relevant economic characteristics.
Another possibility is that a mechanical pricing tool could be used, translating the underlying data derived under the common benchmarking search criteria into mechanical pricing tools such as a formula or a set of quantitative adjustments, to arrive at arm’s length profitability returns suited to the economically relevant characteristics of the tested party.
The design of potential outputs of the Amount B pricing methodology would involve consideration of additional technical features, such as selection of the net profit indicator and the selection of the most appropriate point in the arm’s length range.
The consultation document also lists the documentation that could be required to demonstrate compliance with Amount B.
