OECD progresses its Pillar One international tax solution

15 September 2023

Progress towards the intended ‘two-pillar solution’ to address tax challenges arising from the globalisation and digitalisation of the economy has taken a step forward with the Organisation for Economic Cooperation and Development (OECD) consultation into proposed rules for the operation of Amount B of Pillar One. This follows on from the widespread adoption of Pillar Two rules by national governments.

Pillar One – Amount B

In July 2023, the OECD published its draft guidance for the operation of Amount B. Amount B seeks to streamline the application of the arm’s length transfer pricing principle to comparatively routine marketing and distribution activities. Its aim is to improve tax certainty and reduce disputes between taxpayers and/or tax administrations, especially for jurisdictions with limited tax administrative resources that face challenges in benchmarking appropriate local market comparable data to support arm’s length pricing.

The consultation reflects the current stage of development of Amount B, as the Inclusive Framework (IF) of over 140 countries, which is working on this project through the OECD, is yet to achieve consensus on the approach to be adopted. As such, alternative approaches to characterising the distribution activities in question have been offered by the OECD, and comment has been requested on the proposed scoping, pricing methodology and related matters.

The context – Pillar One

The OECD and the IF have been working on steps to address perceived base erosion and profit shifting (BEPS) by multinational enterprises (MNEs) since the OECD issued its initial BEPS report in 2015. The most recent stage of this has been to devise the two-pillar solution. Pillar One looks at how profit is allocated to entities and jurisdictions within an MNE, while Pillar Two introduces a global minimum tax rate.

Alongside Amount B, Pillar One also introduces new profit allocation rules that allocate a portion of residual profit, Amount A, to market jurisdictions where MNEs have a significant and sustained engagement regardless of whether they have a physical presence there, and Amount C, which provides dispute resolution mechanisms for Amount A.

Proposed approach for Amount B

Amount B seeks to replace the need for business units to individually benchmark their distribution activities with the application of formulaic principles based around comparable data prepared either by the OECD or local tax administrations.

The result is a matrix of expected comparable profit margins, separated into three industry groupings and five levels of ‘factor intensity’ classification, based on a calculation of the operating assets to sales and the operating expenses to sales. By carrying out these calculations for the relevant business unit activities, a comparable profit margin at the earnings before interest and tax (EBIT) level will be provided by the matrix, which, based on the proposed OECD dataset, will be between 1.5% and 5.5%, with an allowable variance of +/- 0.5%. In addition, a ‘cap and collar’ (to address particularly high or low levels of ‘functionality’ within the business unit) will be applied to determine the Amount B target range. The ‘cap and collar’ will be based on the level of gross profit to operating expenses (often referred to as the Berry ratio). 

Where countries have different levels of local risk, there is flexibility to use local comparable data or an adjustment to the core comparable data based on the sovereign credit rating of that territory.
Distribution activities that fall within the Amount B rules will be expected to achieve an appropriate margin based on their classification. Results falling outside the relevant target range will be adjusted to the median of that range.

Amount B – who does it apply to?

Once the rules are finalised, the OECD’s intention is to include them in an updated edition of its Transfer Pricing Guidelines. The implication is that Amount B would therefore apply to all MNEs with in-scope activities falling within the transfer pricing requirements. It is important this is widely understood, as other aspects of Pillar One are expected to apply to only the largest and most profitable MNEs.

Businesses will need to look carefully at the nature of their distribution entities. While the draft rules consult on how in-scope activities should be defined, the intention is for Amount B to apply only to ‘baseline distribution activities’, excluding the ownership of intellectual property, retail activity and the provision of services, amongst other things. A de minimis level of other activity, such as retail sales, will be permitted under the Amount B rules, and streaming may be permitted where other activities can be separated out.


While the Amount B rules seek to simplify compliance, transfer pricing documentation is still expected to be maintained. Transfer pricing method selection and benchmarking will be replaced by an analysis of the Amount B amount, with a functional analysis expected to be required to support the characterisation of an entity’s activities for Amount B purposes.

Next steps

The Amount B rules remain at the consultation stage at present. Consensus will be required amongst IF jurisdictions before they can be adopted. Once achieved, widespread adoption may be helped by the inclusion of Amount B in the OECD Transfer Pricing Guidelines. Implementation of Amount B could therefore follow quickly after consensus is reached.

There are many uncertainties in the draft rules that will need to be addressed by the OECD and the IF before finalisation. Amount B must be effective for all business models, with those based on high volumes at low margins being particularly at risk of incompatibility – it would not be appropriate for group distributors to always achieve a margin higher than the profit of the group as a whole. Clear expectations around the characterisation of activities will also be required. Benchmarking disputes between tax administrations and businesses are often effectively a proxy for challenges to activity characterisation, and Amount B risks characterisation being a prominent issue in itself, in a way that prevents any meaningful simplification.

With this in mind, businesses should look closely at their distribution activities in the context of the draft rules to determine whether they could apply. If they could, modelling is recommended to determine the effect Amount B will have on local taxable profit and the business’s effective tax rate. This information will allow meaningful information to be provided to stakeholders to manage expectations as the Amount B rules move closer to going live.

For more information, please get in touch with Paul Minness, Duncan Nott or your usual RSM contact.