THANKS to the OECD's publicity blitz, by now, most people are aware of the OECD's two pillar approach - a Pillar one representing the rules and conditions for the allocation of an additional taxing right to source countries - the so-called amount A representing a tiny fraction of profits in excess of 10% of in-scope multinational companies that will be allocated to market jurisdictions and a pillar two representing a global minimum tax of 15% with lots of ifs and buts and this is supposed to revolutionize the century-old international tax system.

But there is another element - an Amount B that was not so well-known and was pending resolution and that represents the simplification of the transfer pricing rules in respect of baseline marketing and distribution activities that subsidiaries or other organs of a multinational company undertake in the market jurisdiction. In February 2024, the OECD has published its report on the said amount B which is now to take the moniker of 'simplified and streamlined' approach (S&S). The rules have nothing to do with the allocation of taxing rights but apparently simplifies transfer pricing methodology relating to a fancy baseline distribution function of a group.

OECD Secretariat's unified approach paper also talked of an Amount C that nobody is now talking about and once the work on Amount B is finalized, the decade old saga of the BEPS project will perhaps be over and OECD can then go back to looking after the interests of its member countries without the pretense of an Inclusive Framework that it had assembled to regain its legitimacy and does not know how to deal with now.

In the report released, it is mentioned that the October 2021 paper promised to 'simplify and streamline' the application of the arm's length principle to in-country baseline marketing and distribution activities, with a particular focus on the needs of the so-called low-capacity jurisdictions. Who these low-capacity jurisdictions are? As we shall see there are problems even with the identification of such jurisdictions.

Whatever may be the reason, the February 2024 report contains the guidance on "Special considerations for baseline distribution activities"

According to the report now put out, in July 2023, the Inclusive Framework agreed to publish a final Amount B report, content from which would be incorporated into the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 by January 2024 with due consideration given to both the needs of low-capacity jurisdictions, and the interdependence of Amount B with the signing and entry into force of the Multilateral Convention to Implement Amount A of Pillar One.

The report claims that the simplified and streamlined approach will enhance tax certainty and will relieve compliance burdens for both the taxpayers and tax administrations, particularly those in low-capacity jurisdictions with limited resources.

It is true that many countries in the global South face resource constraints in infrastructure both physical and in the form of trained manpower. So, a truly simplified approach is welcome. But the question is whether the OECD proposed transfer pricing methodology is simple at all. From the process described subsequently in the report, this seems far from the truth.

According to the introduction to the 52- pages report put out in the public domain, Jurisdictions can choose to apply the simplified and streamlined approach in certain circumstances. The conditions, circumstances and the methodology are mentioned in separate chapters to the report and it is not my intention to get into the details of the same.

While browsing through the report what struck me though is the number of reservations made by India and in particular to its observation regarding its inability to further participate in the project if certain conditions are not met. India has been participating very enthusiastically in the BEPS project so far and it is rather unusual to come across such blunt comments from India. So, we will examine the Indian comments and the provocations for the same.

India has made a general observation regarding the report, which is telling:

"India wishes to record its reservation on the incomplete nature of the report owing to the non-inclusion of the definitions of 'low-capacity jurisdictions (LCJs) and 'qualifying jurisdictions'; and an appropriately designed optional qualitative scoping criterion. Further, India also wishes to record its reservation on various aspects of the Amount B design, including but not limited to the operating expense cross-check mechanism and the overall design of the pricing methodology. The detailed reservations are incorporated as footnotes within the report."

According to the introduction to the report, the Inclusive Framework is still working on an additional optional qualitative scoping criterion that jurisdictions may choose to apply as an additional step to identify distributors performing non-baseline activities for the purpose of the simplified and streamlined approach. It is mentioned that the IF will conclude this work by 31st March 2024, with any additions to be incorporated into the OECD Transfer Pricing Guidelines. 31st March has come and gone but there is nothing in this regard at least in the public domain. The Indian note in this regard is:

"India believes that an appropriately designed qualitative criterion is critical to ensure that only baseline distributors are in scope of Amount B. India expresses inability to support the Amount B work further if such a criterion is not incorporated as part of the scoping criteria in this report."

The report states that jurisdictions can choose to apply the simplified and streamlined approach to the qualifying transactions of their in-scope tested parties according to the options. Similar to other elective approaches in the OECD Transfer Pricing Guidelines, the outcome determined under the simplified and streamlined approach by a jurisdiction that has chosen to apply the simplified and streamlined approach to qualifying transactions of its in-scope tested party is non-binding on the counterparty jurisdiction where the associated enterprise that is a party to the controlled transaction is located.

However, subject to their domestic legislations and administrative practices, members of the Inclusive Framework commit to respect the outcome determined under the simplified and streamlined approach to in-scope transactions where such approach is applied by a low-capacity jurisdiction and to take all reasonable steps to relieve potential double taxation that may arise from the application of the simplified and streamlined approach by a low-capacity jurisdiction where there is a bilateral tax treaty in effect between the relevant jurisdictions.

It is stated that the Inclusive Framework will work on the implementation of this commitment in 2024, including through the development of competent authority agreements that could be used within the context of bilateral tax treaty relationships, taking into consideration the dual objective of bilateral tax treaties to avoid double taxation, as well as to prevent double non-taxation.

It is promised that the Inclusive Framework will agree on the design elements and on the list of low-capacity jurisdictions within scope of this commitment by consensus in 2024. The Inclusive Framework will agree on the list of low-capacity jurisdictions by 31 March 2024. No such list is available on the OECD website as yet.

In the context of such a commitment, the India note states:

"India expresses its inability to make a political commitment in respect of an undefined set of jurisdictions termed as "LCJ" in an incomplete Amount B report. India believes that the report should be completed and the definition of "LCJs" should be agreed before the issue of political commitment is taken up."

OECD has been taking a commitment from participating nations, particularly in respect of settling tax disputes raised by multinationals which seemed to be the priority for the OECD in all its action plans. This note by India therefore tries to prevent the adoption of such strategies.

The report describes and defines the set of qualifying transactions within scope of this simplified approach, and consequently the characteristics of in-scope distributors. In-scope distributors, should not own unique and valuable intangibles nor should they assume certain economically significant risks. The simplified and streamlined approach allows in-scope distributors to perform non-distribution transactions when they can be adequately evaluated and reliably priced on a separate basis under the general principles of the OECD Transfer Pricing Guidelines. It also permits the undertaking of de minimis retail sales, while excluding the distribution of digital goods, commodities, and services from its scope.

Note that only determination in accordance with the OECD transfer pricing guidelines is permitted. Not every country uses the OECD TP Guidelines and some may use the UN TP guidelines. Even in India, the OECD TP Guidelines is not compulsory although some tribunal rulings assume so. Therefore, making the use of OECD guidelines compulsory in order to gain some procedural benefit is a not too subtle way of expanding OECD's empire. I must however add that ATAF has welcomed the report and said that many of its members use the OECD TP Guidelines. There is no specific note by India on this point though.

Under the OECD guidelines as also under the domestic transfer pricing legislation in India, the arm's length price is to be determined using the most appropriate method. Adoption of a summary method may clash with the said principle. A section of the report explains the relationship of the simplified and streamlined approach to the most appropriate method principle. We may note that TNMM is the preferred method unless an internal CUP is available.

A further section of the report then sets forth a 3-step process for determining a return on sales for an in-scope distributor which provides an approximation of an arm's length result. This pricing framework includes a matrix of returns; an operating expense cross-check mechanism; and a data availability mechanism. The 3-step process involves the determination of the industry group for the tested party ;determination of the factor intensity on the basis of net operating asset intensity ( ratio of net operating asset to net revenue expressed as a percentage and calculated on a three-year weighted average basis for each fiscal year) and then identify the return from the matrix provided.

India has expressed its reservations in respect of all these aspects and the same is worth noting:

"India records its reservation on the design elements of the pricing methodology, including but not limited to, the exclusion of goodwill from the intangible fixed assets for calculating net operating assets of a tested party, the wide deviation range of +/-0.5% vis-à-vis the median that has been allowed for each cell of the pricing matrix, the design of pricing matrix through use of a single commercial database that has not yielded a geographically representative dataset, the appropriateness of the filtering criteria, the factor used in matrix and their categorisation."

It is seen that the OECD has used Moody's BvD Orbis database. As pointed out by India this is a private database and can only be used by obtaining license from the vendor and may not be available to all for calculation and verification.

Further, India also expressed its in-principal objection to the use of an operating expense-based metric as a cross-check to cap (or collar) the return of the distributors under Amount B. "India considers that the value of a distributor's functional contributions is reflected in the sales made by it, and not in the operating expense of the distributor. India also believes that the cross-check could adversely affect lower income countries, where it considers that the operating expense of similarly placed distributors is systemically lower than in high income countries, and that the alternative cap rates may not sufficiently address this issue."

India also expressed its objection to non-inclusion of an appropriate definition of 'qualifying jurisdictions' and to the proposal to incorporate the same at a later date.

Besides, India also recorded its reservation on the proposal to develop a framework to gather information on the practical application of Amount B as no further details in respect of such framework have been provided. "India also has concerns around the resource-intensive nature of any such exercise, especially from the point of view of capacity constrained jurisdictions."

Ever since the launch of the BEPS project and even earlier in the contest of exchange of information, mutual agreement procedure and dispute resolution, the OECD has initiated a peer review process and arrogated to itself the policing power of many vital aspects of taxation in non-OECD member countries. Many of such processes are extremely detailed, intrusive and time consuming. India's objections in further expansion of such schemes are therefore understandable.

Although India is the only country to voice its concerns, other countries may not also agree to the Amount B proposal. It is widely reported that New Zealand has already mentioned that it will not do so. All in all, it does not seem that much has been achieved so far by way of simplifying and streamlining anything.