OECD’s Transfer Pricing Approach Looks Rocky in the Short Term

The Inclusive Framework on Base Erosion and Profit Shifting on Feb. 19 released its final report on Amount B of Pillar One. The report is being incorporated into the Organization for Economic Cooperation and Development’s transfer pricing guidelines but doesn’t reflect a consensus among the Inclusive Framework jurisdictions on implementing Amount B.

As such, Inclusive Framework jurisdictions will be able to individually determine whether and how they will apply the Amount B principles. In addition to making Amount B entirely elective, application by one jurisdiction will be non-binding on the counter-party jurisdiction.

The level of optionality around Amount B may result in increased transfer pricing uncertainty and greater risk of double taxation.

While Inclusive Framework member jurisdictions have expressed a commitment to respect low-capacity jurisdictions and take all reasonable steps to eliminate double taxation where a bilateral tax treaty is in place, countries and taxpayers likely will need to expend additional resources to navigate these principles as they become effective in 2025.

Basic Features

The basic features of the Amount B final guidance are very similar to the July 2023 consultation document.

A qualifying transaction will be subject to Amount B if it satisfies the specified scoping criteria, which focus on the parties’ assets, functions, and assumed risks. To qualify generally requires that the distributor has a functional, asset, and risk profile that allows for the use of a one-sided transfer pricing method.

Amount B applies only to certain tangible goods. It doesn’t apply to commodities or intangible goods and services, including the distribution of digital services. Because it can be difficult to differentiate between digital goods and services, this development provides welcome clarity for tech companies.

As in the July 2023 consultation document, the final Amount B report contains a pricing matrix of arm’s-length results. Return on sales has been selected as the net profit indicator for pricing the in-scope transactions.

The final report also retains an additional adjustment for country risk. This provides an additional return for distribution activities in certain jurisdictions, based on a measure of sovereign credit risk.

The documentation requirements under Amount B will build on the existing documentation requirements included in Chapter V of the transfer pricing guidelines—that is, local file and master file—which may reduce the amount of new documentation required to comply.

Because a given jurisdiction may choose not to apply Amount B, the final report stipulates that, where one or more of the jurisdictions don’t apply Amount B, the respective competent authorities must justify their positions based only on the remainder of the transfer pricing guidelines.

Takeaways

While the final report provides clarification of and even resolution to several issues raised in the July 2023 consultation document, inconsistent country adoption in substance and timing may prove disruptive.

Accordingly, the stated objective of a streamlined and simplified transfer pricing environment should be considered a long-term rather than short-term aspiration. The short term seems likely to bring greater uncertainty, potential for inconsistent application, and perhaps even higher risk of double taxation than many taxpayers currently face.

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

Mike McDonald is managing director of transfer pricing services at EY’s international tax and transaction services department. The views reflected in this article are the views of the author and do not necessarily reflect the views of EY or other members of the global EY organization.

Write for Us: Author Guidelines