OECD report on Amount B

Under the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, it was agreed to adopt “a two-pillar solution to address the tax challenges rising from the digitalisation of the economy.”

Particularly, under Pillar One, a distinction has been made between Amount A and Amount B. Although it would seem that the two amounts should be related, they are two very different projects.

Under the Multilateral Convention to Implement Amount A of Pillar One, States will be able to tax a portion of the excess profit of certain multinational groups.

Specifically, this refers to groups with net global revenue over EUR 20 billion and total profits greater than 10% of their global revenue (before tax).

However, Amount B (we will keep this term for simplicity) or the optional, simplified and streamlined approach for calculating the remuneration of certain operators is aimed at offering a framework for a simple and agile application of the arm’s length principle to baseline marketing and distribution activities in the country, paying particular attention to the needs of the covered jurisdictions. Its scope does not have subjective limitations, and any multinational group carrying out the transactions specified could be affected by the Amount B approach.

The publication of the final report on Amount B (February 19, 2024) led to its inclusion in the OECD Transfer Pricing Guidelines as an annex to Chapter IV (Administrative procedures for avoiding and resolving transfer-pricing disputes). Therefore, unlike Amount A, it has not been set in stone in any binding legal rule, meaning that its obligatory nature depends on the acceptance of the states. In general, the OECD member states (including Spain) use the guidelines, although it is true that the administrative practice does not always coincide with their content; therefore, this situation is also transferable to Amount B.

Finally, although it is called the final report, the document issued contains sections pending finalization. On June 17, 2024 (as the initially established date of March 31, 2024 had elapsed), a list of covered jurisdictions was published, replacing the original name of low-capacity jurisdictions.

Currently, the key features of Amount B are as follows:

• Implementation

Amount B will be potentially applicable for the fiscal years starting on or after January 1, 2025. However, as mentioned, each jurisdiction decides on its adoption—the different jurisdictions can decide whether to incorporate it and from when to do so—as well on its implementation —at the taxpayer’s choice or of an obligatory nature.

Therefore, it is not designed as a general safe harbor; it will only apply in relation to the jurisdictions that have established it.

The OECD has drafted a list of the jurisdictions covered, considering various factors. The OECD establishes the commitment that when the Amount B approach is used in one of these jurisdictions, the counterpart State (which could be Spain) must accept these amounts. These jurisdictions include Argentina, Brazil, Mexico, Morocco and Peru. As can be seen, the focus has shifted from one of low-capacity jurisdictions to one that includes some of the jurisdictions that have expressed their will in applying the Amount B approach, such as Argentina, Brazil and Mexico.

For now, the Spanish tax authorities have not expressed their acceptance.

• Scope

The Amount B approach is intended to be a simplification measure for distributors, agents and commissionaires engaging in the marketing and distribution of wholesale tangible goods acquired previously from related parties. This first definition excludes retail distribution activities. Also, the final report establishes the possibility to carry out a more demanding test regarding the activities included, as requested by some States. The so-called qualitative analysis is an element that could significantly affect its scope and which, at the same time, is key for its acceptance by some jurisdictions.

Based on the above, the following activities are expressly excluded:

• The marketing and distribution of intangible goods, services and commodities. By excluding the services in general, the digital part of the economy is outside of its scope of application. Therefore, this rule affects globalization more than it does the digital economy.
• Marketing and distribution activities that cannot be classified as baseline, due to the assumption of important risks or due to specific important contributions, e.g., in relation to intangible goods.
• Baseline marketing and distribution activities that cannot be separated from other activities. For these purposes, it will be understood that the wholesale activity is carried out only when the retail distribution and marketing—if these co-exist—does not represent over 20% of net revenues.
• Cases in which the distributors, agents and commissionaires incur operating expenses lower than 3% or greater than 20%-30% of their annual net revenues.

As can be seen, this approach can be simplified, but it requires carrying out a suitable functional analysis to correctly delimit the transactions to which it can be applied.

•  Mechanics

The transactional-net-margin method and the net-margin-in-sales indicator are considered the most appropriate. Although the report recognizes that there could be instances where application of the comparable uncontrolled price (“CUP”) method (using internal comparables) can be appropriate, the Amount B approach can apply in cases where the CUP method is not applicable.

The profitability must be calculated based on a double-entry matrix that considers (i) the net operating asset intensity, and (ii) the operating expense intensity, segmented by three industrial sectors.

There are three steps to be followed:

• Step 1: Determining the applicable industrial sector, subject to there being a correlation between sector and profitability.
• Step 2: Determining the applicable factor intensity, based on five possible classifications structured around the net operating asset intensity and the operating expense intensity (calculating the intensity as the corresponding effect on net revenues).
• Step 3: Identifying the resulting range of the intersection of steps 1 and 2 where a deviation of +/- 0.5% will be accepted.

Also, specific minimum and maximum ranges of net margin of operational costs are established to facilitate adjustment of ranges, and an adjustment mechanism is expected for jurisdictions with little representation in the sample when there is proof that the country risk could affect profitability.  In June 2024, the OECD published a more extensive guide on application of the rule, giving details of the jurisdictions that can apply certain special rules.

•  Documentation

The report includes the main guidelines on documenting this simplified approach and identifying the information needed, so the authorities can assess whether the application criteria are met correctly. While the matrix replaces, if applicable, the corresponding benchmark analysis, the documentation requirements will not vary significantly or lead to a lower administrative burden. 

• Dispute resolution

Given that it is not a mandatory rule and that it can generate discrepancies with the arm’s length principle, the report includes the application of two mechanisms known for resolving disputes:  mutual agreement procedure (“MAP”) and advance pricing arrangement (“APA”).

However, while the objective of the approach is to facilitate management of the covered jurisdictions, there is a commitment of the OECD/G20 Inclusive Framework to (i) respect application of the simplified approach in relation to the covered jurisdictions (according to the definition of June 17, 2024), and (ii) mitigate any possible double taxation if there is a double tax treaty between the affected jurisdictions.

To summarize, the Amount B approach is not related to a determined minimum annual threshold on the revenue of multinational groups; instead, it is related to the decision of each jurisdiction regarding its adoption and application. Therefore, multinational groups must check whether the jurisdictions where they operate adopt the simplified approach, so as to anticipate to what extent they would be affected, and which distortions could lead to an asymmetric implementation. The list of covered jurisdictions published by the OECD is key.