Pillar 1 Amount B: Simplifying the Arm's-Length Principle for Baseline Distribution Activities
Published in Tax Notes International Vol. 112, No. 2 (October 9, 2023)
13 Pages Posted: 29 Nov 2023
Date Written: October 9, 2023
Abstract
On July 12, 2023, the OECD released a public consultation document (PCD) that contained an enhanced design for determining amount B, one of the key features of pillar 1 in the OECD’s two-pillar proposal. A properly designed amount B solution, which in theory would be available for all distribution models within its scope, has the potential to improve tax certainty and reduce the administrative costs of implementing the arm’s-length principle. According to the PCD, the OECD intends to include the amount B solution in the OECD transfer pricing guidelines, although some commentators have argued for a related multilateral instrument in lieu of, or in addition to, inclusion in the guidelines. It is contended here that amount B is an example of a group of economic policies known as “rate-of-return regulatory policies” that have been well developed in the literature and long studied by economists. Some guidance from the study of those policies can therefore logically be applied to the design and implementation of amount B. This would increase the likelihood of the success of amount B while minimizing the unintended negative consequences that typically accompany those policies. For example, of the various types of rate-of-return regulatory policies, reference prices (that is, benchmark rates of return) appear to offer the highest likelihood of success. The OECD secretariat (or another international organization) should be formally tasked with the responsibility and costs of creating and publishing reference rates of return for in-scope entities and activities. The policy should be designed as a safe harbor for taxpayers, implemented through the multilateral memorandum of understanding for low-risk distribution functions already included in the OECD transfer pricing guidelines. The scoping criteria and rate-of-return metrics for amount B should be carefully designed and publicly available so that taxpayers could replicate the findings and make informed decisions regarding their commitment of resources and functional placement for their relevant distribution chains. The annually published reference-pricing policy with its benchmark rates of return for baseline distribution activities should also allow the tax community to adjust rates of return for local circumstances. Over time, public trust in the OECD-published reference prices would increase as taxpayers and tax administrations acquire experience and become more comfortable with managing the methodology and enjoy confidence in the results. In time, the OECD secretariat could then extend the application of this approach to other baseline activities in transfer pricing planning, with the added benefit of strengthening consistency in the application of the arm’s-length principle. In effect, the design and management of amount B in this manner would be an international public good provided by the OECD secretariat to the global tax community.
Keywords: Pillar One, Amount B, OECD, BEPS, transfer pricing, rate-of-return regulations, reference pricing, distribution, low-risk distributors
JEL Classification: F23, H25, H26 K34 K420, K330, L11
Suggested Citation: Suggested Citation