NERA Experts Respond to the Public Consultation Document of Pillar One: Amount B

25 January 2023
Dr. Harlow Higinbotham, Dr. Vladimir Starkov, and Alexis Jin

In a commentary letter submitted to the OECD, NERA transfer pricing experts Dr. Harlow Higinbotham, Dr. Vladimir Starkov, and Alexis Jin offered their views of the recent OECD Secretariat consultation document on Pillar One: Amount B. This document was released on behalf of the Inclusive Framework (IF) on Base Erosion and Profit Shifting led by the OECD and G20 and is part of the ongoing IF work on the tax challenges arising from digitalization of the economy. Amount B is a proposed method to simplify and streamline the remuneration of related-party distributors that perform “baseline marketing and distribution activities” (BMDA) in a manner aligned with the arm’s length principle. Specific needs of low-capacity jurisdictions in establishing arm’s length pricing for BMDA is a particular consideration for the Amount B design.

NERA’s experts recognized tradeoffs must be made between Amount B’s simplicity and the reliability of the method’s results. Facing these tradeoffs, certain taxpayers may wish to preserve the flexibility and reliability of calculating transfer prices by relying on methods other than Amount B. For this reason, the NERA experts propose Amount B be implemented as an optional safe harbor rather than a mandatory regime.

With respect to the scoping criteria for applying Amount B, the opinion of NERA’s experts is that material scoping criteria must be identified based on observable and quantifiable information from independent comparables. To the extent certain scoping criteria are not observable in comparables, burden should not be placed on taxpayers to examine and document the differences. NERA’s experts also provided detailed comments on specific scoping criteria such as retail distribution activities, activities of commissionaires and sales agents, export sales, distribution of commodities and intangible products, and presence of local comparables.

In addition, NERA’s experts provided detailed comments on the proposed design of the transfer pricing methodology for Amount B that envisions either a pricing matrix or a “mechanical” pricing tool.