Crowe observation
As part of this initiative, the OECD specifically focused on the needs of “low-capacity jurisdictions,” which are jurisdictions that have limited capacity to address transfer pricing and have challenges identifying reliable sources of transfer pricing information.
Impact on OECD transfer pricing guidelines (OECD TPG)
From the OECD’s perspective, Amount B is a simplification measure relying on the general principles of the OECD TPG, and not a revision of the principles. That is because, according to the OECD, the Amount B simplified approach approximates an arm’s-length outcome that is consistent with general transfer pricing principles.
Tax authorities electing to adopt the Amount B simplified approach to pricing transactions for eligible distributors can apply it using one of two options:
- Allow taxpayers to elect to use the simplified approach
- Require taxpayers to apply the simplified approach if they meet certain criteria
In-scope transactions
The scope of the OECD’s Amount B guidance is limited to the wholesale distribution of tangible goods, which broadly involves buying goods for resale, identifying new customers, marketing activities, warehousing and logistics, and invoicing and collection. The scope includes buy-sell marketing and distribution transactions as well as sales agency transactions in which the party contributes to a related party’s wholesale distribution of goods to unrelated parties.
Other scope criteria include that the transaction must be able to be reliably priced using a one-sided transfer pricing method such as the transactional net margin method (TNMM), the tested party must have operating expenses within a specific percentage band of net revenue, and the transaction cannot involve the distribution of nontangible goods, services, or commodities (such as metals, oil, and gas). Generally, the TNMM is the most appropriate transfer pricing method when computing transfer pricing under the Amount B rules. However, an exception is provided for which the comparable uncontrolled price method may be applied instead of TNMM for in-scope transactions if reliable internal comparables exist.
Application and documentation for Amount B
When applying the simplified approach for transfer pricing under Amount B, taxpayers are required to use return on sales (ROS) as the net profit indicator. The OECD’s guidance includes a matrix that specifies the appropriate ROS for taxpayers based on a variety of factors, including, for example, their industry grouping and various financial metrics such as net operating asset intensity.
While Amount B is a simplified approach to transfer pricing, documentation still is required within the taxpayer’s local file to demonstrate compliance, including, for example, a description of the transaction, a functional analysis, written contracts, and the relevant financial data.
Looking ahead
Guidance regarding Amount B will be included as an annex to the OECD TPG and likely will take effect for fiscal years commencing on or after Jan. 1, 2025, though some further work for this initiative continues. While Amount B is intended to provide simplification and additional tax certainty, it is unclear if those objectives will be met given the narrow scope of the guidance and the voluntary nature of the approach. Certain countries, such as the United States, still have concerns about the guidance, and it is unclear how widespread adoption will be, as some tax authorities (like New Zealand) already have decided to opt out of Amount B. Nonetheless, taxpayers should consider and model the impact that this approach might have on their operating model, especially given that it might be required in certain jurisdictions that elect a prescriptive approach and that there is no associated revenue threshold.
