On 17 June 2024 the OECD Inclusive Framework on BEPS released supplementary elements relating to the report of 19 February 2024 on Amount B of Pillar One.
Under the streamlined and simplified approach under Amount B, a pricing matrix is used to arrive at an approximation of the arm’s length result for baseline marketing and distribution activities. This approximation of the arm’s length result is shown as a matrix taking into account net operating asset intensity (OAS); operating expense intensity (OES); and industry groupings. For the purposes of the simplified and streamlined approach, the return on sales is applied as the net profit indicator for establishing pricing outcomes for transactions within the scope of the rules.
An operating expense cross-check is then applied as a “guardrail” within which the primary return on sales is applied as a net profit indicator. The cross-check mechanism provides for the application of default cap rates and alternative cap rates, the alternative cap rates being applicable where the tested party is located in a “qualifying” jurisdiction.
Where the application of the return on sales net profit indicator produces a result outside the pre-defined operating expense cap-and-collar range determined by applying the matrix, the profitability of the tested party is adjusted. So where the equivalent return on operating expense of the tested party determined by the application of the matrix exceeds the operating expense cap, the return on sales of the tested party will be adjusted downwards until it results in an equivalent return on operating expense equal to the operating expense cap.
Analysis suggests that adjustments arising from the operating expense cross-check may occur more frequently for distributors in lower income jurisdictions compared with higher income jurisdictions. It was therefore decided that a second, higher set of operating expense cap rates, would apply in cases involving “qualifying” jurisdictions.
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he additional guidance now issued by the OECD clarifies that “qualifying” jurisdictions are jurisdictions that are classified by the World Bank Group as low income, lower-middle income, and upper-middle income jurisdictions based on the latest available “World Bank Group country classifications by income level”. The list of qualifying jurisdictions for this purpose has now been provided and will be updated every five years on the OECD website.
Definition of qualifying jurisdiction for the data availability mechanism
The data availability mechanism allows for upward adjustments to the returns from the pricing matrix in cases where there is insufficient data in the global dataset of a jurisdiction to validate the appropriateness of the Amount B pricing matrix; and where there is also evidence that that jurisdiction could be considered a higher risk jurisdiction. Sovereign credit ratings are used to identify higher risk jurisdictions and to quantify the adjustment under the data availability mechanism.
The definition of a qualifying jurisdiction for this purpose is a jurisdiction with a publicly available long term sovereign credit rating of BBB+ or lower from a recognized independent credit rating agency; and with fewer than five comparables in the global dataset. The list of qualifying jurisdictions for this purpose has been published and will be updated every five years on the OECD website.
