OECD Transfer Pricing Guidance Offers Clarity but Isn’t Complete

The OECD has resolved in new guidance most, but not all, of the unanswered questions surrounding Amount B, a crucial part of Pillar One of the global tax treaty.

Amount B aims to simplify transfer pricing compliance and reduce controversy by setting profit targets for “baseline marketing and distribution activities” of tangible goods.

A February report on Amount B from the Organization for Economic Cooperation and Development had left open several issues, including:

• The list of covered jurisdictions within the scope of political commitment on Amount B, formerly known as “low-capacity jurisdictions.”
• The definitions of qualifying jurisdictions under Section 5.2, for applying special cap rates for the operating expense cross checking; and Section 5.3, for adjusting data availability to determine applicable Amount B margins.
• An additional, optional qualitative scoping criterion that jurisdictions can apply as another step to identify in-scope distributors.

The OECD’s June 17 guidance resolves the first two points. The list of covered jurisdictions contains 66 low- and middle-income jurisdictions, with notable representation from African, Middle Eastern, and smaller Asian economies. It also includes larger developing economies—including Brazil, Mexico, Argentina, Nigeria, and Thailand—that have committed to implementing Amount B.

The main implication of covered jurisdictions is that all Inclusive Framework jurisdictions commit to accepting the outcome under Amount B when a party that isn’t located in a covered jurisdiction transacts with a baseline distributor that is in a covered jurisdiction.

Inclusion in this list doesn’t necessarily mean that the jurisdiction must implement Amount B. Non-Inclusive Framework members that are low- or middle-income jurisdictions—under the World Bank Group’s country classifications by income level—may be added to the list of covered jurisdictions if they express willingness to apply Amount B.

Joining either list of qualifying jurisdictions provides an opportunity to calculate and apply higher Amount B margins through specific adjustments to Amount B standard margins. The lists for each of the two adjustments include more than 130 low-income, lower-middle-income, and upper-middle-income jurisdictions and are similar but not identical, due to different criteria applied to compile the lists.

The absence of any reference to the optional qualitative scoping criterion is notable, as specifically India considered this a mandatory element to be able to commit to Amount B. The new guidance identifies the definition of covered jurisdiction for the Inclusive Framework’s “political commitment as the last remaining issue to be concluded to facilitate implementation of the simplified and streamlined approach” starting Jan. 1, 2025.

That could be interpreted as saying no optional qualitative scoping criterion will be released, which might place India’s willingness to apply Amount B into question. The new guidance also doesn’t address whether Amount B will eventually be made mandatory, a characteristic strongly demanded by the US and made a precondition to signing the Multilateral Convention to implement Amount A.

We will have to observe how this develops, though the OECD has mentioned that at least the mandatory application might be dealt with in a phase two.

The new guidance confirms the fundamentals of the Amount B framework that will take effect Jan. 1, 2025. However, Inclusive Framework jurisdictions continue to discuss aspects such as optionality of the Amount B rules, and we expect the rules will evolve further, even after 2025.

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

Imke Gerdes is partner in Baker McKenzie’s New York office and a member of the firm’s North America Transfer Pricing Steering Committee. She focuses on European and Austrian tax law.

Richard Fletcher heads Baker McKenzie’s UK Transfer Pricing Group in London. He has experience in transfer pricing and related taxation issues.

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