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Jakarta, Ideatax -- In the previous article, we have discussed the OECD's Pillar One Amount A. As we know that while Amount A updates the international tax framework by focusing on large and profitable multinational companies, Amount B focuses on simplifying transfer pricing rules for all taxpayers (OECD, 2023). Therefore, it is undeniable that amount B is an essential part of pillar one of the OECD.
As an overview, amount B focuses on the application of transfer pricing method on marketing and distribution activities. Based on reports from developing countries, it is known that between 30% and 70% of transfer pricing disputes originate from marketing and distribution activities. Therefore, the OECD felt the urge to formulate amount B as an effort to increase legal certainty, reduce the number of tax complaints and disputes, and reduce the administrative costs of countries with less robust tax administration systems (OECD, 2023).
Background
Before discussing what amount B is and how it is applied, it would be better if we know the background of the formulation of it. Starting on 14 October 2020, members of the OECD/G20 countries who are members of the Inclusive Framework on Base Erosion and Profit Shifting published a report entitled Tax Challenge Arising from digitalization - Report on Pillar one Blueprint. The Blueprint states that Amount B in pillar one was issued to improve the efficiency of the price determination process in marketing and distribution activities in accordance with the Arms-Length Principle (ALP). Therefore, it can be said that the purpose of Amount B is to promote tax certainty and reduce disputes between taxpayers and tax authorities.
Also Read: TP Doc as the Starting Point of ALP Testimony
Furthermore, on 8 October 2021, the OECD countries gathered in the inclusive framework agreed on a two-pillar solution to address tax challenges arising from the digitalization of the economy. The OECD working group in the Inclusive Framework stated that Amount B is one of the components of pillar one, which reads as follows:
“the application of the arms-length principle in country baseline marketing and distribution activities will be simplified and streamlined, with particular focus on needs of low capacity countries”
Based on the above, it is clear that the Inclusive Framework calls for the arms-length principle of marketing and distribution activities to be simplified and effectively implemented in baseline pricing.
Scope
As mentioned earlier, the scope of amount B is retail traders who distribute goods, including sales agent commissions. Furthermore, the OECD also describes that the scope of amount B focuses on determining the baseline of retail distributors whose prices can generally be relied upon using one of the transfer pricing methods. Within the scope of amount B, distributors are allowed to conduct non-distribution transactions when they can sufficiently evaluate the TP method used separately.
Pricing framework
Based on the OECD report, it is known that in developing the amount B framework, the OECD also developed a price matrix. The price matrix is required in the application of amount B as a basis for reference unless there is a situation where the Comparable Uncontrollable Price (CUP) method is available.
Furthermore, OECD (2023) explains that the price matrix is an application of the arms-length principle reflected in the selling price where the application of the concept of arms-length principle depends on specific features owned by the distributor such as the amount of assets used for operations, operating expenses or industry. The price matrix also contains features that serve to overcome geographical differences and data availability gaps.
References
OECD. (2023). OECD logoTax Challenges Arising from Digitalisation – Report on Pillar One Blueprint : Inclusive Framework on BEPS. Paris: OECD.
OECD. (2023). Pillar One Amount B in a Nutshell. Paris: OECD.
OECD. (2023). Public Consultation Document Pillar One - Amount B. Paris: OECD.
