BEPS 2.0: New transfer pricing guidance issued for multinational companies
Following the 2015 publication of the Action Reports by the Organisation for Economic Cooperation and Development (OECD), as part of the Base Erosion and Profit Shifting (BEPS) project, work in relation to Action Point 1: Addressing the Tax Challenges of the Digitalisation of the Economy has been ongoing.
On 1 July 2021, 130 countries in the OECD/G20 Inclusive Framework on BEPS (IF) approved a historic statement for reform of the international tax rules. The Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy introduced:
- Pillar 1 – including Amount A (permitting allocation of taxing rights to market jurisdiction in respect of the most profitable multinational enterprises worldwide) and Amount B (aiming to simplify the application of existing transfer pricing rules); and
- Pillar 2 – the introduction of a global minimum tax rate.
The IF has since made a number of publications relating to Amount B, including the ‘Pillar One – Amount B’ report on 19 February 2024. The guidance is aimed at providing a simplified and streamlined approach to the application of the Arm’s Length Principle (ALP) for in-country baseline distribution and marketing activities.
In this insight, we explore what Amount B is, how it operates, our observations, and how we can help.
What is Amount B?
Amount B provides for a simplified and streamlined approach for application of the ALP (which seeks to align arrangements between related parties with that seen between independent parties) to in-country baseline marketing and distribution activities. It seeks to address the needs of Low-Capacity Jurisdictions (LCJ) with more limited administrative resources and covers qualifying transactions undertaken by wholesale distributors. It can be introduced by jurisdictions on a mandatory or optional basis, or not at all.
Amount B looks to simplify the transfer pricing requirements applicable to wholesale distribution of tangible goods, regardless of industry and revenue levels. It achieves this by establishing a fixed Return on Sales (RoS) ranging from 1.5% to 5.5% (+/-0.5%) subject to a cap-and-collar mechanism and additional adjustments for certain qualifying jurisdictions. The pricing is dependent on the in-scope entity’s industry, operating assets and operating expenses as well as the jurisdiction in which the activities are undertaken.
Amount B has been incorporated into the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) as an Annex to Chapter IV and may apply for qualifying transactions for fiscal years beginning on or after 1 January 2025.
Scope
Amount B is underpinned by the ALP and Chapters I-III of the OECD Guidelines and requires qualitative analysis to determine in-scope entities and qualifying transactions. Where a jurisdiction does not apply Amount B, the OECD Guidelines take precedence; however, where Amount B is applied, the arm’s length return for baseline distribution and marketing activities can be supported through a fixed return based on the entity’s industry grouping, quantitative ratios and adjustments (depending on the jurisdiction in which the entity operates).
In determining the scope of the simplified and streamlined approach, it is vital to consider the jurisdiction in which activities are taking place, whether an entity is in-scope, and if the transaction qualifies. You can find more detail on scope, pricing and documentation requirements in our detailed BEPS 2.0 – Pillar 1, Amount B Summary collateral sheet.
On 26 September 2024, the IF published the Model Competent Authority Agreement (MCAA) as a practical tool to facilitate the implementation of the commitment to respect Amount B outcomes with respect to covered jurisdictions. Further details on this can be found here.
Our observations
What is clear from the Amount B guidance is that the approach is underpinned by the ALP and that there is a continued need for accurate delineation in line with the OECD Guidelines’ existing approach. Appropriate application requires a thorough analysis as would be required for testing any related party transaction; however, there is the possibility that economic analysis performed for qualifying transactions could become more streamlined and consistent.
Despite its potential, the varying approaches of jurisdictions to Amount B and the numerous reservations of certain countries on its design has created uncertainty as to whether the objective of greater administrative simplicity and reduced tax disputes will be achieved.
At a minimum, businesses with wholesale distribution activities will be required to assess their position, including whether they operate in-scope activities and whether their related party transactions are qualifying, in territories introducing Amount B on a mandatory basis. Beyond this, businesses can review their transfer pricing policies to determine whether applying Amount B on an optional basis provides a beneficial simplification and the impact of applying the approach to country and group level Effective Tax Rates (ETR).
Taxpayers will need to remain conscious of the asymmetric application of Amount B as countries begin to implement the provision (or not). Reviewing the position as early as possible can minimise any disruptions to existing transfer pricing policies.
We are here to help
Our specialist transfer pricing team can support businesses preparing for the introduction of Amount B in several ways, including:
- Qualitative analysis, including determining whether entities are in-scope and whether transactions are qualifying.
- Quantitative analysis, including assessing the applicable fixed return for any qualifying transactions / in-scope entities, testing the potential returns and flow through to counterparties and assessing the impact on profits at a country level as well as Group ETR.
- Documentation, including a review of existing documentation and evidentiary information to support application of the simplified and streamlined approach and determining areas where further work can be undertaken (for example, in relation to written contracts or potential avenues for improving tax certainty, such as Advance Pricing Agreements).
- Implementation, including reviewing existing transfer pricing policies as well as processes and systems, making recommendations to ensure businesses are Amount B ready and assessing broader tax impacts, such as those related to customs/indirect taxes.
If you have any questions on Amount B’s simplified and streamlined approach or would like assistance with understanding the impact on existing transfer pricing policies, please contact Nick Cullen via the form below. Alternatively, speak to your usual Azets advisor.
The information contained within this insight is for guidance only and does not constitute advice which should be sought before taking any action or inaction.
