Consolidated Report on Amount B

1. The report on Amount B, which provides a simplified and streamlined approach for baseline marketing and distribution activities, was approved and published by the Inclusive Framework on 19 February 2024 and incorporated as an Annex to Chapter IV of the OECD Transfer Pricing Guidelines.

2. The report was published pending completion of further work on outstanding administrative aspects of the guidance, including the definitions of qualifying jurisdiction within the meaning of Section 5.2 and Section 5.3 of the guidance.

3. For the purposes of the simplified and streamlined approach, an operating expense cross-check is applied as a guardrail within which the primary return on sales net profit indicator is applied. The mechanism provides for the application of default cap rates and alternative cap rates, with the latter being applicable where the tested party is located in a qualifying jurisdiction.

4. Analysis suggests that adjustments arising from the operating expense cross-check may occur more frequently for distributors in lower income jurisdictions compared with higher income jurisdictions.  Some IF members believe that result is inappropriate and inequitable, while others believe it reflects an economically rational outcome from the operation of the operating expense cross-check. To accommodate both views, a compromise was reached whereby a second, higher set of operating expense cap rates, will apply in cases involving “qualifying jurisdictions.” 

5. Some IF members accepted the compromise under the rationale that a higher frequency of adjustments arising from the operating expense cross-check results in an inequitable use of operating expenses in the design of the guardrail, whereas other IF members accepted the compromise under the rationale that a higher frequency of adjustments would place a greater burden on low-capacity jurisdictions in having to administer the guardrail. On this basis, “no inference” language has been included in the definition and reflects the fact that the inclusion of alternative cap rates in the design of the guardrail should not be construed as implying that the operating expense cross-check would (in the absence of the alternative cap rates) appropriately or inappropriately apply to lower income jurisdictions due either to lower operating expenses in such countries as compared with higher income jurisdictions or due to lower capacity in such countries as compared with higher income jurisdictions.

6. However, both groups of IF members agreed that “qualifying jurisdiction” is not defined by reference to low capacity.

7. The data availability mechanism provides for upward adjustments to the returns otherwise derived from the pricing matrix in certain circumstances. The mechanism is intended to account for cases where there is no or insufficient data in the global dataset for a particular tested party jurisdiction upon which to validate the appropriateness of the Amount B pricing matrix coupled with evidence that that jurisdiction could be reasonably considered a ‘higher risk’ jurisdiction. Sovereign credit ratings are used as a proxy to determine ‘higher risk’ jurisdictions and to quantify the applicable adjustment under the mechanism.