“Amount B” and more uncertainty
On October 8, 2021 the Inclusive Framework (“IF”) organized by the Organisation for Economic Cooperation and Development (OECD) reached political agreement on reforming the international tax system (“IF agreement”) using a two pillar model. The first pillar (Pillar 1) involves amending the rules on taxable presence and profit attribution. This will allow, subject to conditions, tax to also be levied in countries where a group has customers but is not physically present there. Based on the latest status of Pillar 1, it seems that this taxation under “Amount A” will only apply to taxpayers with a worldwide consolidated revenue of at least EUR 20 billion and profitability above 10%. For more information about this, I refer to the Pillar 1page.
In addition to Amount A, Pillar 1 also contains an Amount B competent, which may apply to every taxpayer, regardless of worldwide revenue. The intention of the IF at the time Amount B was proposed was to simplify, streamline and avoid disputes about fees and the transfer pricing systems of baseline marketing and distribution offices in cross-border situations (certain activities and/or industries being excluded). The OECD’s public consultation document released on July 17, 2023 presents the last outstanding considerations. Interested parties have until September 1, 2023 to provide input. The intention is that Amount B will be included in the OECD Transfer Pricing Guidelines in January 2024. Many OECD countries, including the Netherlands, regard the OECD Transfer Pricing Guidelines as providing an appropriate interpretation and clarification of the arm’s length principle, both in a national and an international context and in situations where tax treaties apply. In other countries, such as Sweden and Norway, the OECD Transfer Pricing Guidelines even have direct effect.
So far, fees and the transfer pricing systems of baseline marketing and distribution offices must be substantiated separately with objective data, for example by means of benchmark studies. Upon the entry into force of Pillar 1 and Amount B, a matrix with fixed operating profit margins / returns will, under certain conditions, apply to such baseline marketing and distribution offices. (Whether these will apply as guideline or be mandatory still has to be decided.) A lot simpler, you might think. However, by means of a 40-page document, i.e. the OECD’s public consultation document, it has quickly become clear that the conditions under which this regime may be applied are open to debate. In addition, with regard to the fixed operating profit margins / returns in the matrix, it still needs to be determined under which industry the distribution office will fall. The ratio of operating assets also still has to be looked into, and the operating expense intensity must be taken into account. It is entirely possible that this simplification could lead to far more complicated analyses and other types of disputes.
To avoid disputes, you’d normally expect a bilateral Advance Pricing Agreement (BAPA) to offer a solution. After all, if two or more states agree to the fee for the distribution office before the in-scope transactions take place, this cannot be disputed later in the tax return. The very short section on certainty in the OECD’s public consultation document does not include any explicit options for such BAPAs or for advance certainty on Amount B, although you would expect this. It therefore seems unlikely that it would be possible to deviate from the Amount B rules in a new APA or BAPA, if these apply. Given the extensive qualification rules for applying the Amount B regime and the variety in the returns matrix, it is questionable whether competent authorities will be able to reach a consensus quickly, if at all.
The OECD’s public consultation document further notes that a pricing arrangement under an Advance Pricing Agreement (APA) concluded before Amount B took effect, should take precedence over the new ‘simplified’ method under the new Amount B rules. This should work out well for BAPAs, given that the competent authorities have committed themselves to the previous agreement, whereby it does not seem likely that disputes will arise later on. However, once this involves a unilateral APA, thus where a taxpayer has only made tax arrangements in one state via a unilateral APA, this could well lead to disputes with the tax authorities of the other state involved in the distribution transaction. The OECD’s public consultation document explains that if a dispute arises, a mutual agreement procedure (MAP) may be initiated between two or more countries in order to resolve the dispute. Included in parentheses (implying that the final text is still under discussion) is that in such cases the new 'simplified’ method under the new Amount B rules must be taken into account. In that case, how much certainty does an existing unilateral APA still offer? And how do external stakeholders, such as auditors, deal with such positions? Also, how will competent authorities treat new APAs or BAPAs for baseline marketing and distribution offices that are applied for before Amount B takes effect and which deviate from the Amount B rules applying so far?
It’s therefore essential that you properly prepare yourself for these new Amount B rules. The first step is to follow the progress of Amount B and developments in this area. Taxpayers can also prepare for Amount B by taking a careful look at their current transfer pricing policy on baseline marketing and distribution offices. The OECD’s recently released consultation document includes for the first time the Amount B matrix with fixed operating profit margins / returns. Taxpayers can compare these returns with their current transfer pricing policy. It’s also a good idea to check whether APAs have been concluded and how these agreements will be impacted if in January 2024 other prices could apply under Amount B.
Interested to hear about what Meijburg can do for your organization in the area of Tax Controversy and Tax Dispute management, how it can help you with Amount B or do have any other questions? Feel free to contact Janneke Versantvoort or other members of our Tax Controversy team to arrange an introductory meeting.