OECD Amount B Is a Milestone, but Shows More Needs to Be Done

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting’s final report on Amount B represents the culmination of a great deal of effort since 2021, as well as active engagement and input by interested stakeholders. But a lot more work is necessary for Amount B to be the game-changer that many expect it could be, especially for low-capacity jurisdictions.

The framework expects the simplified and streamlined approach set out in last month’s report to reduce transfer pricing disputes and compliance costs/obligations, as well as to enhance tax certainty for taxpayers and tax administrations. But a lack of consensus on Amount B implementation remains.

Three-Step Approach

The report sets out a three-step approach for simplifying pricing of in-scope transactions that approximates an arm’s-length result in the tested party’s jurisdiction. The approach includes a pricing matrix, a cross-check mechanism for operating expenses, and a mechanism to address instances when data is unavailable or insufficient in a specific jurisdiction.

While we should welcome the the simplified and streamlined approach, along with its intention to simplify the pricing of certain distribution activities, the ability of jurisdictions to opt out is disappointing.

This disappointment is compounded by the implementation optionality outlined in the report. Adopting jurisdictions are permitted to allow businesses to elect themselves whether to apply the approach where the scoping criteria are met.

The report confirms that the analysis supporting the simplified and streamlined approach will be updated every five years, save for significant market changes. Financial data will be reviewed annually and updated where necessary. This is a positive step to simplify associated compliance burdens.

Additional Work

The report highlights areas where additional work is being (and will be) done on Amount B. This includes design of additional optional qualitative scoping criteria that jurisdictions may choose to apply as an additional step to identify distributors performing non-baseline activities.

The report confirms the Inclusive Framework members’ commitment to respect the outcome determined under the simplified and streamlined approach to in-scope transactions where the approach is applied by a low-capacity jurisdiction. Further, members will take all reasonable steps to relieve potential double taxation that may arise from the application of the approach by a low-capacity jurisdiction where there is a bilateral tax treaty between the relevant jurisdictions.

A two-fold implementation of these commitments will be carried out this year. First, competent authority agreements will need to be developed for bilateral tax treaty relationships where Amount B is applied by low-capacity jurisdictions to avoid and prevent double taxation. Second, the framework will need to agree by March 31 on the list of low-capacity jurisdictions for this purpose.

The commitment is vital to low-capacity jurisdictions and seeks to answer the calls of such jurisdictions by allowing them to secure revenue and preserve valuable tax administration resources.

However, jurisdictions’ ability to opt out—as well as the potential for voluntary effective operation—significantly undermines the position of low-capacity jurisdictions. The extent of the additional work required in this area also calls into question whether these measures will ultimately benefit low-capacity jurisdictions.

Alongside the inclusion of the Amount B guidance into the OECD’s transfer pricing guidelines, the Inclusive Framework also plans to develop text for inclusion in the commentary on Article 25 of the OECD Model Tax Convention on mutual agreement and MAP arbitration procedures.

The confirming changes, which must be approved by the OECD Council prior to publication, will signpost specific language in terms of tax certainty and the elimination of double taxation. The relevant changes will aim to ensure preservation of optionality in all dispute resolution mechanisms for non-adopting jurisdictions.

Information Gathering

The report also highlights the need for the framework to gather information on the practical application of the simplified and streamlined approach. The system’s design will build on information available from current reporting requirements and audit practices. The framework doesn’t expect an unreasonable administrative burden to be placed on tax administrations in this regard.

India, in contrast, expressed reservations about the information-gathering proposal on the basis that no further details have been provided on the resource-intensive nature of any such exercise, especially for low-capacity jurisdictions. The country also expressed concern over aspects of the report it views as incomplete, because the definitions of low-capacity jurisdictions and qualifying jurisdictions weren’t included.

Amount A Interdependence

Amount A of Pillar One provides a new taxing right to jurisdictions in which consumers and users are in respect of a portion of the resident profits of the largest and most profitable multinational enterprises.

The framework will need to do more work on the interdependence of Amount B and Amount A prior to the signing and entry into force of the Multilateral Convention to Implement Amount A, the text of which was released in October 2023.

Still, the Inclusive Framework has made progress on Amount B since 2021. But the importance attached to certain outstanding provisions of the initiative, along with the disappointing introduction of optionality around implementation, will mean that many taxpayers and advisers will likely be underwhelmed.

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

Robert Dever leads the Irish tax practice of Pinsent Masons, advising large domestic and multinational corporations on all aspects of Irish corporate and transactional tax.

Write for Us: Author Guidelines