Bloomberg Tax
March 2, 2023, 8:00 AM

Pillar One Amount B—Issues for Emerging and Developing Economies

Bert  Steens
Bert Steens
Transfer Pricing Economists for Development
Sébastien Gonnet
Sébastien Gonnet
Transfer Pricing Economists for Development
Philippe Paumier
Philippe Paumier
Transfer Pricing Economists for Development
Andréa  Massamba Leho
Andréa Massamba Leho
Transfer Pricing Economists for Development

The OECD published a public consultation under Pillar One on Dec. 8, 2022, setting out the main elements of Amount B and asking a number of questions of the public. The consultation ran until Jan. 25.

Transfer Pricing Economists for Development submitted a memo to the Organization for Economic Cooperation and Development in response. In this article, the authors, all members of TPED, summarize their public comments, which are primarily directed towards emerging and developing countries.

The Public Consultation

We acknowledge that drafting a balanced set of regulations on Amount B that achieve goals of simplification, without losing necessary accuracy in relation to the arm’s length principle, is a difficult exercise. Nevertheless, we believe that the current draft embeds unjustified complexity that might prevent the achievement of both goals, or that will narrow the implementation of Amount B to a very limited number of operators in the emerging and developing markets.

What is Amount B?

In December 2021, OECD member states agreed to a two-pillar solution to tackle tax challenges arising from the digitalization of the economy.

Amount B is a simplified solution to the application of the arm’s length principle to distribution and marketing activities. With its streamlined approach, the OECD wants to focus on low-capacity countries.

Which intra-group transactions are in scope? The scope of Amount B is narrow—it applies to two types of intra-group transactions:

  • Buy-sell arrangements where the distributor purchases goods from one or more associated enterprises resident in other jurisdictions for wholesale distribution to unrelated parties primarily in its local market, and
  • Sales agency and commissionaire arrangements where the tested party contributes to wholesale distribution of goods for a related party.

What are Amount B scoping criteria? If the transaction is in scope, the tax administration or taxpayer needs to assess whether the Amount B scoping criteria are met.

The scoping criteria as defined by the OECD are a mixture of qualitative and quantitative measurements. Qualitative elements include the limitation of the activity and function performed. The distributor must not perform any economic activity other than its core distribution function or perform any risk control functions.

Quantitative elements include certain thresholds on annual net sales. The distributor must mainly generate its annual net sales from customers located in its market of residence and must not perform ancillary activities up to a certain percentage—not yet determined—of its annual net sales.

Issues with Amount B in Emerging and Developing Countries

Difficulties in low-capacity jurisdictions in implementing the arm’s length principle: Tax administrations and businesses have raised concerns on difficulties faced when implementing the arm’s length principle. There have been significant developments, often fostered by multilateral bodies, but tax administrations’ lack of resources, and the lack of comparables, have been a hurdle in the proper implementation of the arm’s length principle in many low-capacity jurisdictions.

Therefore, the simplification targeted with Amount B might provide a significant upside in the application of the arm’s length principle in emerging and developing countries.

Inadequacy of the emerging and developing markets realities: Emerging economies are characterized by less homogeneous risk patterns than developed economies, with two important consequences. The first relates to the difficulty of delineating a limited number of micro-economic or entity-level based factors to explain profitability levels between emerging countries—or group of countries—and developed economies, or between emerging countries. The OECD has acknowledged that it hasn’t identified enough of these factors to explain levels in profitability to establish “cause and effect.” As a consequence, there are inherent difficulties in delineating Amount B and setting arm’s length margins under Amount B in these countries.

However, significant results could be achieved with a limited number of factors, such as industry and country risk, to capture main trends, rather than developing an over-complex arsenal of entity level factors that won’t achieve the expected simplification outcome and won’t gain endorsement.

The second implication is associated with the effective management of such risks by multinational enterprises in emerging countries and the level of effective control of risks by local operators. Because the operational risks in emerging countries tend to be less homogeneous than in developed economies, MNE affiliates in emerging countries tend to bear more responsibilities in the management of those risks. While this would automatically disqualify local operators in emerging countries as having a limited contribution to the value chain of MNEs, the scoping criteria in terms of risk management as currently drafted in the consultation have the potential to exclude a large number of MNE affiliates from eligibility to Amount B, and undermine the expected benefit of the measure.

Limited effect in emerging and developing countries: If the concept of Amount B is to be incorporated into the OECD Transfer Pricing Guidelines, it will be important to encourage widespread adoption of the principles. The concept of low value-adding services was also intended to be a pragmatic measure of simplification for transfer pricing analyses. However, many developing countries haven’t introduced the concept and it remains irrelevant. Therefore, including it as an elective provision in the guidelines is likely to have the same limited effect in a number of developing countries unless those countries actually endorse it. For this reason, it is imperative that the principles of Amount B are considered sufficiently attractive to all stakeholders.

Some Suggestions

To improve the current document:

  • Define broader functions eligible for the regime, with factors that aren’t subject to interpretation either by taxpayers or by tax administrations.
  • Provide base search standards for benchmarking the remuneration of the eligible functions, including search standards for countries lacking comparables. This should include using a limited number of standard adjustments of comparables through the issuance of specific guidance on adjustments sustained by econometric analysis focusing on a small number of variables that could be multilaterally accepted. One of such adjustments should be a country risk adjustment if the only available comparables are located in countries with a dissimilar level of country risk.
  • A suggested framework for foreign comparables selection:
    • Use of domestic comparables—if unsuccessful,
    • Use of regional panel from countries with similar risk levels—if unsuccessful,
    • Use of panel outside the tested party’s region, including from countries with similar risk levels—if unsuccessful,
    • Use of a panel including countries with dissimilar risk levels, adjust for the differences.
  • Publish OECD ranges of arm’s length results, on a regular (to be determined) basis, with a relevant level of segmentation—for instance, by industry, region, country risk.
  • Envisage that the simplification measure could be characterized as a safe harbor regime, provided the scoping respects the eligibility criteria defined above, and that the metrics of the regime are aligned transparently with the economic adjustments prescribed by the guidance.
  • Broaden the scope of Amount B not only to low risk distributors. This would have the benefit of including distributors in emerging and developing countries in the scope, which most of the time bear inherent risks (higher than in developed countries). If emerging and developing countries are in scope, it is essential that country risk be factored in the calculation of the Amount B.

What’s Next?

The OECD aims to release the final Amount B rules by mid-2023. We encourage the OECD to take into account the specificities of emerging and developing countries, for which simplification in transfer pricing might well provide a significant upside, if well thought out and structured.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Bert Steens, Sébastien Gonnet, Philippe Paumier and Andréa Massamba Leho are members of Transfer Pricing Economists for Development. TPED is a Paris-based association aiming to promote business economics knowledge-sharing in transfer pricing, notably in emerging and developing countries. The views expressed are those of the authors, not necessarily those of TPED or its other members. The views expressed are also not those of the affiliated organizations of the authors.

The authors would like to thank Michael Hewson for his contribution to this article.

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