New OECD report on Pillar One – Amount B

Targeting mainly the world's largest corporate groups, Pillar I sets rules for the redistribution of part of their profits to the countries where their products are sold (market jurisdictions). Among the issues discussed is the allocation of a return on sales percentage (Amount B) in the market jurisdiction; this is covered in the new report on Pillar I - Amount B dated 19 February. 

Amount B will become part of Chapter IV of the OECD Transfer Pricing Guidelines, the interpretative framework for arm’s length pricing in the Czech Republic. Unlike Pillar II, the new rules for Amount B are not limited by the size of the corporate group or company. Potentially, the rules could be implemented from 1 January 2025.  

​The report proposes that jurisdictions implement a simple return on sales matrix that under certain conditions should be applied to wholesale distributors or sales agents who would thus have the certainty of a correct profit indicator in the jurisdiction that has adopted the guidelines, without extensive benchmarking. Among other conditions, to be able to apply the matrix: 

• the taxpayer must be a wholesale distributor, sales agent or commissionaire involved in the sale of goods 
• the taxpayer must not trade in commodities or intangible assets 
• non-distribution activities must be separable from distribution activities 
• retail revenues must not exceed 20% of three-year average revenues 
• in the transaction under review, annual operating expenses must not account for less than 3% or more than 20% (30%) of revenues. 

 
Jurisdictions that choose to implement Amount B can choose between two regimes: under the first regime, the simplified and streamlined approach using Amount B is voluntary, and companies may still demonstrate that their transactions are at arm’s length using their own benchmarking (essentially a safe harbour regime); the second regime allows the jurisdiction to recommend or demand the use of the return on sales as per the report by all companies that meet the criteria.  
While the intention is certainly commendable, the report itself raises several implementation issues. First, it is not clear which countries will adopt the rules resulting from the report and when. New Zealand, for instance, has already announced that it will not adopt the rules because of its sufficiently developed tax system, while India also has significant reservations against the report. This suggests that if some jurisdictions adopt the new rules while others do not, it may lead to increased administrative costs and paradoxically result in double taxation.

Moreover, the use of a simplified profit indicator matrix requires a clear identification of the transaction and the demonstration that quite robustly defined criteria have been met, which goes against the intention to simplify the documentation agenda. Finally, the methodology used in the development of the Amount B profit indicator matrix does not correspond, e.g., to the methodology for conducting comparative analyses recommended for the Czech Republic by the General Financial Directorate’s Instruction D-34, which may lead to significantly different results and the reluctance of the Czech tax administration to accept the rules set in the OECD report on Amount B. It is not yet clear which approach the Czech Republic will take.  

The report on Amount B is thus aimed rather at developing countries, while questions remain as to its implementation in developed tax systems (including ours). However, it is advisable to monitor Pillar I and the implementation of Amount B, and possibly to model the impact of these rules, particularly for taxpayers with distribution activities in developing countries.  

KPMG's detailed analysis is available here.