Fie Consult LLP International Tax Watch: Public Consultation Document on Pillar One Amount B


The Organization for Corporation and Economic Development (OECD) published a consultation document on Pillar One Amount B on 8th December 2022 with a deadline on 25th January 2023.

The Amount B is intended to standardize the remuneration of distributors (Subsidiary or permanent establishment) that buy products from related party for resale by using the separate entity approach the arm’s length principle as a simplification measures.

Pillar One Amount B has 4 building blocks which include:

Scope of Amount B: It explicitly states that Amount B shall apply to certain types of transactions between two related companies. These transactions include:

  • Buying and selling goods
  • Sales agency and commissionaire arrangements
  • Excluded transactions (In-scope controlled transaction covered by a bilateral or multilateral advance pricing arrangement between the jurisdictions of the supplier and the distributor)

These criteria are based on the economic characteristics of the transaction, such as the functions performed, assets owned and risks taken by each party. In addition, the scoping criteria, which are the rules used to decide if a transaction should be looked into more closely, contain both qualitative assessments and quantitative measurements. 

Qualitative assessments are related to the financial characteristics of the transaction and quantitative measurements can be taken from the records of the distributor (the person selling the goods or services). These measurements can be used to set limits on activities that are related to the transaction, and if the limits are not exceeded, it can be assumed that the transaction has the correct financial characteristics. Quantitative measurements can also be used to decide if the distributor owns anything that has financial value that is related to the transaction.

Amount B Pricing Methodology: This is designed to help overcome common problems when setting prices for marketing and distribution activities. These issues can include the amount of time and resources needed to compare prices, the risk of arguments over pricing, the lack of good comparisons in certain places, and the lack of resources in places with fewer resources.

Amount B pricing methodology currently builds upon the following objectives:

  • To rely on financial information of comparable independent entities drawn from commercial databases through the application of commonly agreed search criteria; 
  • To provide arm’s length results that account for the relevant economic characteristics of the tested party and the comparable
  • Lastly, to publish and periodically update the arm’s length results.

The key design technical features that has been put in order to firm up on pricing the tested related party transactions include;

Net Profit Indicator: In applying the TNMM, the selection of the most appropriate net profit indicator should take account of;

  • the respective strengths and weaknesses of the various possible indicators
  • the appropriateness of the indicator considered in view of the nature of the controlled transaction, determined in particular through a functional analysis
  • the availability of reliable information
  • the degree of comparability between controlled and uncontrolled transactions, including the reliability of comparability adjustments that may be needed to eliminate differences between them

Documentation Requirements: The consultative document stipulates that having good and detailed documentation of a company’s transfer pricing is important. This documentation will show the tax authorities that they have all the necessary information to be able to do a risk assessment and decide if they need to audit the company. 

In the case of Amount B, the documentation is also important to make sure the tax authorities have enough reliable information to decide if the company’s-controlled transactions need to be priced in accordance with the Amount B pricing methodology.

Chapter V of the Guideline provides guidance on how to structure transfer pricing documentation, which is divided into three parts: the master file, local file and the country-by-country report.

In relation to Amount B, Taxpayers with controlled transactions that fall under Amount B must provide certain information to their tax administrations in order to prove that they are in compliance with Amount B. This information includes;

  • a statement declaring that the information provided is true and accurate
  • a description of the controlled transaction, an explanation of other financial relations between the tested party and other associated enterprises, and annual financial accounts.
  • They must also provide an explanation of how the pricing methodology of Amount B was applied and, if applicable, an explanation of any transitional issues. 
  • Finally, they must provide a copy of the written contract for the controlled transaction, including details about the parties, the duration, and the responsibilities of the supplier and distributor.

Tax Certainty: The consultative document stipulates that there are certain rules that apply to transactions involving the marketing and distribution of products (Amount B). These rules are intended to make it easier to identify and calculate taxes related to these transactions, reducing the chance of disputes between taxpayers and tax administrations. However, disagreements may still arise, and taxpayers can use different mechanisms to resolve disputes. Documentation can also help to prevent disputes.

Taxpayers can take steps to prevent future disagreements about how a certain tax rule (called “Amount B”) should be applied. One way to do this is to set up an “Advance Pricing Arrangement” (APA) which is discussed in more detail in the OECD Transfer Pricing Guidelines. Even if the transaction is not complex, taxpayers can still use an APA to get tax certainty. If there is a disagreement between the taxpayer and the tax administration, the taxpayer can ask for a “mutual agreement procedure” which can help resolve the disagreement between the two countries. In some cases, the disagreement may lead to double taxation and the taxpayer can ask for a “corresponding adjustment” to solve the problem. If the two countries cannot agree, the taxpayer may be able to ask for arbitration. This would be the only way to get rid of the double taxation.

Author: Eddie Opiyo