BDO Transfer Pricing News

International - OECD publishes additional Amount B guidance

The OECD/G20 Inclusive Framework on BEPS on June 17 released supplementary information regarding the report on Amount B of Pillar One and guidance to ensure consistent implementation and application of the global minimum tax under Pillar Two.
Amount B is a new approach for pricing baseline marketing and distribution activities that seeks to streamline and simplify the application of the arm’s length principle. This new approach applies to all taxpayers regardless of size and profitability. A report on Amount B was approved and published by the Inclusive Framework on 19 February 2024 and incorporated as an annex to Chapter IV of the OECD Transfer Pricing Guidelines.

That report was published pending completion of work on some outstanding administrative aspects of the guidance, including the definition of the term “qualifying jurisdiction” for purposes of Section 5.2 and Section 5.3 of the guidance, and the definition of “covered jurisdiction” within the scope of the political commitment regarding Amount B. The supplementary guidance – consisting of two separate documents -- completes the work on those sections of the report.
Covered Jurisdictions
According to the Amount B report, jurisdictions can choose to apply the simplified and streamlined approach to the qualifying transactions of their in-scope tested parties; the outcome determined under the simplified and streamlined approach by a jurisdiction that has chosen to apply the new approach is not binding on the counterparty jurisdiction. However, members of the Inclusive Framework committed to respect the outcome determined under the simplified and streamlined approach when the approach is applied by a “low-capacity jurisdiction.”

The Inclusive Framework originally said it would agree on the list of low-capacity jurisdictions by 31 March 2024; however, that deadline passed with no list. The first supplementary guidance document now addresses this point. The term “low capacity jurisdiction” has been replaced by “covered jurisdiction,” to avoid any suggestion that the jurisdictions covered by the commitment are necessarily low-capacity jurisdictions.

The criteria for determining the list of covered jurisdictions are as follows:
  • Low- and middle-income Inclusive Framework jurisdictions using the World Bank Group country classifications by income level, excluding EU, OECD, and G20 member countries.
  • Low- and middle-income Inclusive Framework jurisdictions that are OECD and G20 member states that expressed to the Inclusive Framework a willingness to apply Amount B by March 2024.  Argentina, Brazil, Costa Rica, Mexico, and South Africa fall under this category.
  • Any non-Inclusive Framework jurisdiction that meets the first criterion and expresses to the Inclusive Framework a willingness to apply Amount B will be added to the list of covered jurisdictions.
The list of covered jurisdictions for purposes of the Inclusive Framework political commitment on Amount B as of June 2024 includes 66 countries, and the list will be reviewed every five years.
Qualifying Jurisdictions
For purposes of the simplified and streamlined approach, an operating expense cross-check is applied as a guardrail within which the primary return on sales net profit indicator is applied. The mechanism provides for the application of default cap rates and alternative cap rates, with the latter being applicable where the tested party is located in a “qualifying jurisdiction.”

The second supplementary guidance document clarifies that Inclusive Framework members agreed that the term “qualifying jurisdiction” is not defined by reference to low capacity. Rather, qualifying jurisdictions for purposes of the operating expense cross-check refers to jurisdictions that are classified by the World Bank Group as low income, lower-middle income, and upper-middle income based on the latest available “World Bank Group country classifications by income level.”

The current list of qualifying jurisdictions includes 132 names and will be updated every five years.

The second guidance document also provides a definition of “qualifying jurisdiction” for purposes of the data availability mechanism described in Section 5.3 of the Amount B report. The data availability mechanism is intended to account for cases where there is no or insufficient data in the global dataset for a particular tested party jurisdiction and that jurisdiction is a “qualifying jurisdiction” within the meaning of Section 5.3

In this context, the new guidance provides that the term qualifying jurisdiction refers to jurisdictions with a publicly available long term sovereign credit rating of BBB+ (or equivalent) or lower from a recognised independent credit rating agency, and less than five comparables in the global dataset.

As with the other lists, this one will be updated every five years on the OECD website.

Laurie Dicker
BDO in United States
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