The B side of Transfer Pricing

By Robin Hart Jianwen Lu, CFA Haruka Abe

In early January 2025, the OECD released a set of tools to facilitate the implementation of Amount B, including a Pricing Automation Tool and fact sheets that outline a multi-step process for determining eligibility and pricing of baseline distribution transactions under the Simplified and Streamlined Approach (SSA) to apply the arm's-length principle.? Most people who have been following the OECD’s progress on this issue will know this as Amount B, which applies primarily to limited-risk distributors. ?For familiarity, we will continue to call it Amount B in this article.

Another important update is that the IRS has issued Notice 2025-4 in the United States. This notice states an intent to introduce Amount B on an elective basis, allowing taxpayers to apply it on a transaction-by-transaction and year-by-year basis. However, the final adoption and regulatory framework remain uncertain.

While it is true that few countries have already formally adopted Amount B, more countries are expected to do so (with a retroactive effective date of January 1, 2025) and other tax officials are talking about Amount B as a “reference price”, meaning that it is becoming an informal benchmark.?Furthermore, the potential use of Amount B as an informal benchmark raises the question of whether tax authorities inherently expect transactions or tested parties that are scoped out of Amount B (e.g., retail distribution or the distribution of software or services) to earn a higher return than the Amount B target. Accordingly, we recommend that businesses begin scenario analyses comparing their transfer pricing benchmarks and policies against the Amount B targets.

What is in the Fact Sheets?

The OECD’s fact sheets outline a multi-step approach for determining whether a transaction qualifies for Amount B and how to apply the pricing framework.

Step 1: Identifying In-Scope Transactions

The first step involves scoping transactions to determine whether they qualify for the simplified pricing approach.

Step 1-1: Qualifying Transactions

A transaction qualifies if it falls within the following categories:

• Buy-sell marketing and distribution transactions involving the wholesale distribution of tangible goods.
• Sales agency and commissionaire transactions where the agent or commissionaire contributes to the wholesale distribution of tangible goods.

Step 1-2: Qualitative and Quantitative Scoping Criteria

To be in scope, the tested party (typically a distributor) must meet the following qualitative criteria:

• Doesn't own unique and valuable intangibles.
• Doesn't assume economically significant risks.
• Doesn't engage in excluded activities, such as:

1. Distribution of services, commodities, or digital goods.
2. Retail sales, exceeding 20% of total net revenue.
3. Non-distribution functions such as manufacturing, research and development (R&D), or procurement, unless those activities can be reliably segmented.

This effectively limits the scope to routine wholesale distribution of tangible goods (expect commodities) while excluding transactions with complex intangibles or significant non-distribution functions.

Further, transactions must meet financial thresholds to qualify for Amount B:

• Operating Expense Intensity (OES) must fall between 3% and 20-30% of net revenue.

*Jurisdictions can select the upper bound between 20% and 30% (we note that the IRS indicates a preference for a 30% limit).

*OES is a weighted average ratio based on three-year average operating expenses over three-year average net revenue for the prior three years (i.e., for tested period year x, the years x-3, x-2, and x-1 should be used for this OES check).

If a transaction meets both the qualitative and quantitative criteria, it is considered in-scope for Amount B.

Step 2: Applying the Amount B Pricing Framework

Once a transaction is determined to be in scope, its pricing is established using a standardized approach.

Step 2-1: Pricing Matrix – Determining the Return on Sales (RoS)

The RoS is determined based on:

• Industry grouping – Identifying the industry classification of the tested party’s products.

*For a detailed walkthrough of how to apply industry groupings, please see the section below on the Pricing Automation Tool.

• Factor intensity classification – Determined by operating expense intensity (OES) and net operating asset intensity (OAS).
• Pricing matrix – Based on industry and factor intensity classification, a benchmark RoS range is identified as shown in the following matrix (with a weighted average to be calculated based on the industry grouping based on certain thresholds):

Table 1: RoS Pricing Matrix

Step 2-2: Operating Expense Cross-Check (OECC)

To ensure that the pricing matrix does not yield an anomalous result, an operating expense cross-check is applied.

• The return on operating expenses is compared against a cap-and-collar range based on factor intensity and jurisdiction.
• If the result falls outside the predefined range, the RoS is adjusted up or down accordingly.

Step 2-3: Data Availability Mechanism (DAM)

In certain cases, an upward adjustment to the RoS is applied when the tested party operates in a:

• Jurisdiction with insufficient comparables in the global dataset to validate the pricing matrix; and
• Jurisdiction that is high-risk based on its sovereign credit ratings.

Pricing Automation Tool

The OECD also provided an Excel-based tool available for download, which demonstrates the practical application of Amount B with actual financial data. ?This tool clarifies the standardized approach for calculating operating assets as well as other key financial ratios utilized to determine the appropriate RoS.? The tool is limited to Step 2 and does not include scoping under Step 1.

The pricing automation tool provides clarification of the intended computation where the OECD's Final Report on Amount B is ambiguous.? Specifically, in Step 2-1, the applicable industry grouping(s) of the tested party has to be identified from the three possible groupings (i.e., industry group 1, 2, and 3, where industry group 2 includes a catch-all category) and identify the applicable return on sales in the pricing matrix. ?The Final Report clearly explains the application of the 80/20 rule when two industry groupings are involved but does not clarify the situation where products from three industry groupings are sold by the tested party.? To recap, if more than 80% of the sales fall into a single industry grouping, then less than 20% of sales that fall into other industry groupings will not count towards the Amount B target in the pricing matrix; accordingly, the return under Step 2-1 will be determined by the “primary” industry grouping only. ?However, the Final Report itself is unclear as to whether the 20% revenue threshold applies to each industry grouping separately or multiple industry groupings in aggregate.??? Thankfully, the automation tool clarified this point through Excel modeling. ?Examples are shown below:

1)??? Example 1:

Company S distributes products from Industry Grouping 1, 2, and 3 where sales revenue from these three groupings are 45%, 45%, and 10%, respectively. In this case, as none of the industries 1, 2, or 3 exceeds the 80% threshold, a weighted average return based on the proportions of sales of all three industry groups should be calculated.        

2)??? Example 2:

Same facts as above but sales are 75%, 15%, and 10%.? In this case, the primary industry 1 generates revenue below 80%.? Even though the revenue from Industry 2 and Industry 3 is each below 20% of the total revenue, the combined Industry 2 and 3 revenue exceeds 20%.? Therefore, a weighted average return of all three industry groups should be applied.        

3)??? Example 3:

Same facts as above but sales are 85%, 10%, and 5%. ?In this case, the primary Industry 1’s revenue exceeds the 80% threshold and the combined Industry 2 and 3’s revenue is below 20%.? Therefore, a return referring only to Industry 1 should be applied.        

The Final Report states that an acceptable return for the tested party is within plus or minus 0.5% of the RoS given in the pricing matrix in Step 2-1, which is the basis for any subsequent adjustments that may apply under Step 2-2 and Step 2-3. ?However, the Final Report does not provide examples of the +/- 0.5% range in the application of the adjustments under Steps 2-2 and 2-3 and the pricing automation tool also does not include the application of the range concept.? Simulations that we have run show that adopting the +/- 0.5% range at Step 2-1 can result in an ultimate Amount B range narrower than 100 basis points after applying Steps 2-2 and 2-3.? Note that Step 2-1 is determined based on the tested party’s historical financial ratios, meaning that the target RoS can be identified from the pricing matrix ahead of time; however, Steps 2-2 and 2-3 require the current year OES and OAS ratios, which?is a complicating factor for companies to implement Amount B.

Let’s Talk

Please contact us for a demonstration of Amount B using our custom-built Amount B engine that covers both scoping (Step 1) and pricing (Step 2), which has been tested for consistency with the OECD’s pricing automation tool (which lacks scoping functionality).

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