OECD Amount B Guidance Will Remove Roadblocks but Adds Wrinkles

The OECD’s additional guidance for its report on Amount B addresses several open questions that were in the report, but the incremental clarity creates more complexity and challenges for multinationals to address.

The guidance, published June 17, explains which jurisdictions qualify for Section 5.2 (the operating expense cross-check) and for Section 5.3 (the data availability mechanism). The OECD also published a statement defining and providing an extended political commitment to certain covered jurisdictions.

Operating Expense Cross-Check

Section 5.2 provides a cap-and-collar operating expense cross-check range. It generally sets limits for a tested parties’ earnings before interest, and taxes to a ratio of its operating expenses between a range of 10% to 40%, 60%, or 70%, depending on the business’ net operating assets to net revenue.

If the tested party’s ratio is outside the cap-and-collar range, adjustments are required to the tested party’s return on sales (as determined under the pricing matrix) to bring its equivalent return on operating expenses within the range.

But adjustments from this cross-check may occur more frequently for distributors in lower income jurisdictions. A second higher set of operating expense cap rates applies to distributors in jurisdictions on the newly published list of 132 qualifying jurisdictions with caps of 45%, 70%, or 80%.

The difference in applying the second higher set of operating expense caps isn’t mechanically more difficult. But because the set of countries applying this higher cap could change every five years, it adds another layer of uncertainty for taxpayers to consider in using what is meant to be a simpler transfer pricing method.

Data Availability Mechanism

Section 5.3 provides a data availability mechanism for upward adjustments to the returns otherwise derived from the pricing matrix, and it aims to account for cases where there is insufficient data in the dataset for a particular tested party jurisdiction. The list includes 135 jurisdictions.

Qualifying jurisdictions for purposes of Section 5.3 include those with a publicly available long-term sovereign credit rating of BBB+ or lower and fewer than five comparables in the global data set.

While the guidance provides needed certainty on the jurisdiction for which the data availability mechanism applies, the mechanism itself is a layer of complexity that affected multinationals will need to consider.

Covered Jurisdictions

The new guidance’s statement on covered jurisdictions provides an initial list of 66 jurisdictions that will benefit from a political commitment from Inclusive Framework members to respect their application of the simplified and streamlined approach and take appropriate steps to relieve any double taxation. It also describes criteria for being added to the list.

In a departure from the February Amount B report, the political commitment is no longer limited to low capacity jurisdictions. Instead, it now extends more broadly to include:

• Low- and middle-income Inclusive Framework members (according to World Bank classifications) other than EU, OECD, and G-20 member countries.
• Low- and middle-income Inclusive Framework jurisdictions that are OECD and G-20 countries and expressed a willingness to apply Amount B by March 2024, which include Argentina, Brazil, Costa Rica, Mexico, and South Africa.
• Non-Inclusive Framework members that meet the low- and middle-income criterion and expressed willingness to apply Amount B.
• Other Inclusive Framework or non-Inclusive Framework members for which Inclusive Framework members have agreed to extend the political commitment on a bilateral basis.

The extended political commitment provides an important benefit to multinationals with tested parties in the covered jurisdictions given the otherwise inherent uncertainty in the global application and implementation of Amount B.

The OECD intends the list to be updated every five years. Interestingly, the political commitment isn’t reciprocal.

Although Inclusive Framework members must generally respect covered jurisdictions’ application of the simplified and streamlined approach, covered jurisdictions aren’t obligated to adopt the approach. This limits the certainty provided by the list because multinationals will still need to separately track whether and when each covered jurisdiction adopts Amount B.

Takeaways

The additional guidance provides greater clarity that will likely remove roadblocks to adoption and help multinationals plan for implementation on a country-by-country basis.

But it comes with a trade-off of new wrinkles. While each of these lists is meant to consist of certain low- and middle-income jurisdictions or those with limited data, they all serve different purposes and therefore aren’t uniform.

Consider four of the largest jurisdictions: Brazil, China, India, and Mexico. All four of these countries are qualifying jurisdictions for Section 5.2 purposes, but only Brazil and Mexico are qualifying for Section 5.3 purposes. Of the four, only Brazil and Mexico are covered jurisdictions because they expressed interest in adopting Amount B.

While the lists provide certainty that had been missing, the inconsistencies among them create more aspects for multinationals to consider when trying to determine how the simplified and streamlined approach should be applied in various jurisdictions.

Given the additional guidance, multinationals with in-scope marketing and distribution arrangements should continue monitoring implementation progress in the jurisdictions where they have such arrangements. They should develop a customized country-by-country plan for compliance in response to the three lists.

They also should continue to prepare transfer pricing benchmarking analyses and documentation to support their distribution affiliates’ compliance where appropriate—for example, in non-adopting jurisdictions and non-covered jurisdictions outside the scope of the Inclusive Framework’s political commitment.

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

Jenny Austin is partner in Mayer Brown’s tax controversy practice and international tax and transfer pricing team.

Jason Osborn is partner at Mayer Brown and co-leader of the international tax and transfer pricing team.

Tyler Johnson is a senior associate in at Mayer Brown and a member of the tax controversy practice and international tax and transfer pricing team.

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