The OECD has published a model tax treaty for countries to adopt so that international distributors may optimize and fix their tax bill year by year.
The treaty applies to eligible importers that import physical goods from a related foreign supplier. Much international trade is done this way.
The model treaty issued September 26, 2024 is known as the “Model Competent Authority Agreement on the Application of the Simplified and Streamlined Approach”.
The taxable profit, oddly called “Amount B”, is part of Pillar 1 in the OECD’s two pillar plan to tax the digital economy.
About Amount B
The “simplified and streamlined approach” is a quick way of assessing the arm’s length taxable profit of importers.
It takes account of the sector, the operating expenses and the sovereign risk of the country concerned.
The computerized process takes seconds. It is a lot faster and cheaper than traditional transfer pricing studies.
Detailed rules apply and the calculations are complex, but the software crunches the numbers for you.
About the model agreement.
The model agreement to help provide a legal basis for the speedy Amount B calculation. But it takes two to tango.
Once the import country accepts the resulting transfer price, the model agreement also helps the export country accept the corresponding transfer price at its end. Otherwise double taxation will ensue.
The agreement provides that: When the simplified and streamlined approach is used by the tax administration of Country A (the import country) or a taxpayer elects to apply the approach in Country A, the competent tax authorities agree that the return for qualifying transactions, will be treated as providing an acceptable approximation of an arm’s length outcome (Section 3).
Also, the applicable upper percentage limit of the operating expenses-to-net revenues criterion should be agreed by the countries concerned (Section 2).
The export country’s competent tax authority must accept the Amount B outcome if the import country’s tax authority verifies the relevant conditions have been met and the relevant rules have been applied (Section 4(2).
Any such agreement apply to qualifying transactions from January 1, 2025 or the month after both countries sign off, whichever is later.
In the event of a dispute, the competent tax authorities will apply the Amount B guidance to endeavor to resolve the case by mutual agreement. But no back-up procedure is provided if they don’t agree (Section 4(1)).
In which countries does Amount B apply?
The answer is not clearcut at this stage.
Currently, only around 66 countries are signed up “covered jurisdictions” including Mexico, South Africa, Ukraine and Vietnam and others – mainly developing countries. The USA, EU and most other affluent western countries are not covered jurisdictions. In Notice 2025-04, the US Treasury and IRS announced their intention to issue proposed regulations on Amount B.
In the meantime, the OECD says that around 147 countries of the OECD’s “Inclusive Framework” (should respect the outcome where such an approach is applied by a “covered jurisdiction” where a bilateral tax treaty exists, i.e. relieve double taxation.
Also, the OECD says such an agreement is optional, and does not impede the use of “other means” (presumably case-by-case agreement) or agreement with countries not on the “covered jurisdiction” list.
Comments:
On balance, businesses and tax administrations may find the new rules very helpful. Distributors can optimize and fix their tax bill year by year.
Around 147 countries are expected to embrace the new rules to varying degrees.
The rules enable eligible taxpayers to: (1) more easily fix their own tax bill, and (2) to optimize it. This is by choosing between Amount B or regular transfer pricing studies covering each country concerned.
We predict that multinationals might just implement Amount B anyway unless challenged, as an OECD-acceptable simplified and streamlined approach.
Next Steps:
- We have developed easy software for international distributors to evaluate whether to apply the OECD’s Amount B. Well worth trying. Contact: [email protected]
2. As always, consult experienced tax advisors in each country at an early stage in specific cases.