Transfer Pricing – OECD Pillar 1 Supplementary Guidelines on Amount B

Further to the report published on Amount B- a simplified & streamlined approach for application of arm’s length principle to baseline marketing & distribution activities, OECD on Jun 17, 2024 issued supplementary Guidance on “Qualifying Jurisdiction“ & “Covered Jurisdictions”. Access VSTN alert published earlier on Amount B in comments.

1. QUALIFYING JURISDICTION –  SECTION 5.2 – OPERATING EXPENSES CROSSCHECK
   In Feb 2024 Report, a guardrail in the form of operating expenses cross-check mechanism, through a cap-and-collar, was included to determine whether the return on sales arrived using Amount B global pricing matrix is appropriate or requires adjustment. The mechanism provides for application of default cap rates & alternative cap rates (qualifying jurisdiction). Now Qualifying Jurisdiction are those classified by World Bank Group (WBG) as low income, lower-middle income, & upper-middle income based on the latest available ‘WBG country classifications by income level’. The current list of Qualifying Jurisdictions includes 132 countries, which also features India, China, Turkey, Malaysia & Mexico.
2. QUALIFYING JURISDICTION FOR SECTION 5.3 – DATA AVAILABILITY MECHANISM.
   The February 2024 report, included a data availability mechanism which provides for an upward country risk adjustment to the returns derived from the pricing matrix in respect of qualifying jurisdictions that do not have/insufficient data points in the global dataset. For this now qualifying jurisdiction for the purposes of Section 5.3 is a jurisdiction with sovereign credit rating of BBB+ or lower & has less than 5 comparables in the global dataset.
3. COVERED JURISDICTIONS
   The February 2024 report provided for an agreed political commitment under which the IF members commit to respect the Amount B outcome where the approach is adopted by a Low-capacity jurisdiction (LCJ) & relieve potential double taxation. Now LCJ is replaced with “Covered Jurisdiction” and includes :-
   • Low & middle-income IF jurisdictions, based on WBG classifications, excluding EU, OECD & G20 member jurisdictions; or
   • Low & middle-income OECD or G20 IF jurisdictions that expressed willingness to apply Amount B by Mar 2024; or
   • Any low- & middle-income jurisdiction, not in the inclusive framework, but otherwise meeting criterion & expresses willingness to apply Amount B.

Argentina, Brazil, Costa Rica, Mexico, & South Africa have expressed interest to IF. On a bilateral basis, Jurisdictions may extend their political commitment to other jurisdictions.

The list of qualifying jurisdictions & covered jurisdictions will be published & updated every 5 years on the OECD website.

With expected implementation of Amount B from Jan 1, 2025, all business should evaluate impact of Amount B as there are no thresholds for applicability.