The Ongoing Journey of Amount B

Episode Summary

Amount B is designed to streamline transfer pricing for baseline distribution and marketing companies worldwide, but “we’re apparently in a world of complexity and controversy,” says Jessie Coleman.

A principal at KPMG, Jessie joins Skadden attorneys Nate Carden, David Farhat, Eman Cuyler and Stefane Victor to discuss everything there is to know about the current and future status of Amount B. Together, they explore questions of scoping – will jurisdictions agree that an entity is in-scope? – and who’s signing on to Amount B, as well as tensions that may arise over how to handle disputes.

For companies that would likely be in-scope when implementation launches, Jessie suggests they prepare by monitoring their assets-to-sales, which will drive where they fit in the Amount B matrix. “I think knowing the unknown right now is really important,” she observes.

Key Points

• The A-B Disconnect: Only the largest companies apply for Amount A, while there is no size threshold on Amount B – meaning a company could be any size as long as it's a wholesale distributor and it passes quantitative screening.
• The Question of Scope: Jessie notes that the Amount B guidance released this year didn’t clarify questions of qualitative scoping, an omission that complicates the initiative.
• Win for Developing Countries: The ATAF, for one, says that Amount B is good for developing countries, which often don’t have the resources to analyze transfer pricing. Jessie sees it as a win in terms of time and savings for such jurisdictions.

Voiceover (00:02):
This is GILTI Conscience, casual discussions on transfer pricing, tax treaties and related topics. A podcast from Skadden that invites thought leaders and industry experts to discuss pressing transfer pricing issues, international tax reform efforts and tax administration trends. We also dig into the innovative approaches companies are using to navigate the international tax environment and address the obligation everyone loves to hate. Now, your hosts, Skadden partners, David Farhat and Nate Carden.

Nate Carden (00:35):
Hi, everybody, this is Nate Carden as always here with David Farhat, Stefane Victor and Eman Cuyler. This is GILTI Conscience. Today’s episode is geared toward our transfer pricing nerds, but everybody should stay tuned because we’re going to talk a lot about the overlap between Amount B as part of Pillar One and the broader international tax landscape that we all find ourselves moving into. We’re joined today by Jessie Coleman, a veteran of GILTI Conscience, who is going to give us an update on Amount B as well as talk about her perspective on where things are headed generally. Jessie, welcome back.

Jessie Coleman (01:12):
Thanks, Nate. Delighted to be here as a transfer pricing dork, so glad to be here.

Nate Carden (01:16):
We have our audience. What’s going on with Amount B?

Jessie Coleman (01:22):
It’s a great question. Maybe we should talk about what’s been happening over the last couple of months because I think that’ll give us a better context here. In February of this year, so 2024, we had a release of Amount B that was I guess about a 40 or 50-page document and that was essentially final guidance that is going to go into the transfer pricing guidelines, so the OECD transfer pricing guidelines. It did have quite a number of reservations from India in it, but other than that, it was a consensus inclusive framework document. What that document laid out for us was the approach to Amount B. Just to take a step back even further, maybe, Amount B is part of the Pillar One package. There’s the Amount A, which is the reallocation of taxing rights. That has in my mind nothing to do with the arm’s length standard.

(02:21):
Then there’s also been Amount B, which has been part of the package I would say since its inception, which is streamlining the transfer pricing for baseline distribution and marketing companies. What this February document did, it gave a lot of clarifications. Essentially, it said that Amount B should only apply to wholesale distribution. It gave some places where Amount B doesn’t apply, so commodities, financial transactions, services, anything in the digital arena. It also put forward this very interesting application and interesting in that it gave countries just a lot of options. In this document it says a company can decide it wants to elect Amount B, it can do so on a voluntary basis, so it makes the companies in its jurisdictions adopt. It can do so on a safe harbor basis, so a company can choose if they want to adopt or they can just do nothing at all.

(03:26):
This February document did have a provision that was kind of later tweaked but for low-capacity jurisdictions, and that February document said if a low-capacity jurisdiction did decide to adopt Amount B, the counter jurisdiction agrees as long as it’s an inclusive framework member, which I guess everybody is, that it would accept the application of Amount B. The document also went through a bit on qualitative scoping and quantitative scoping. Ultimately, if we take it really high level, it also has a matrix that it put together. What a return on sales should be, you look at the industry that a company is in, so what’s its distributing and then you look at its operating expense to sales and its operating assets to sales and you look at the matrix and you essentially find a point for where Amount B is.

(04:26):
Quite a bit was in that document. Quite a bit, probably was not in that document as well, this optional approach, but then what we also had is in June, we had a second release. Although to be perfectly frank, I was expecting a much larger release, but this second release just had a couple of clarifications, one being that, that low-capacity jurisdiction that I mentioned, that changed a bit in that it said a covered jurisdiction would be respected on the other side and the covered jurisdictions, they published a list of those within that list you see developing countries. Then of note, you also in this June release saw that Mexico, Argentina, South Africa, that they all seem like they want to adopt Amount B in some respects. It’s been quiet since July, which is kind of interesting too, because the timing on that February document said it’s going in the transfer pricing guidelines and countries can implement starting January 1st, 2025. That’s just a couple of months around the corner.

David Farhat (05:36):
Jessie, if we throw back to our last conversation, I know one of the things we talked about was the goal of Amount B to simplify some of these transactions and the transfer pricing for some of these transactions. Did the documents that came out in February and June do that, in your opinion? Did we get that simplification or are we dealing with some of the same complexity we were debating during our last conversation?

Jessie Coleman (05:58):
A lot of the same complexity that we talked about with some additional complexity of not knowing which jurisdictions are going to implement and how they’re going to implement it. They did clarify some of the definitions that we had talked about that were causing some companies heartburn, specifically if you’re looking at if you need to figure out where your operating assets to sales are, you need a good definition of operating assets. They certainly advance the ball in giving better definitions in it, but still a lot of clarifications are going to be needed in order to even implement what came out in February.

Eman Cuyler (06:34):
Jessie, going back to the point you made about what companies and businesses will be in scope, can you talk a little bit about that? Because it seems like for Amount B, size really doesn’t matter as long as you’re undertaking suitable distribution activities.

Jessie Coleman (06:49):
100% correct, and I think that also is a huge disconnect with Amount A. Only the largest companies apply for Amount A, and you’ve got about B. They did not put a size threshold on Amount B. Arguably, if a country decides to adopt, it could be any size distribution operations as long as it’s a wholesale distributor and you pass the quantitative screening that was included in the February document. That’s some operating expense to sales criteria and the qualitative criteria, it’s in, regardless of size.

Eman Cuyler (07:27):
Do we have any ideas about what kind of documentation? Let’s say that once it’s determined that you are within scope, what kind of documentations would be required for any within scope of Amount B activities?

Jessie Coleman (07:38):
That’s such a good point because I think that this also gets back to the question David asked about the complexities and maybe things not being quite so simple. Traditionally, we do transfer pricing documentation, we’ve all probably seen it, but industry functions, assets and risks, et cetera. Then you’ve got the economic analysis that has your comparable search and would show how the comparables you selected are in the range of your tested party. If you were in a jurisdiction that adopted Amount B, you wouldn’t need that economic analysis as long as you don’t need it for the other side of the transaction. Here in this world I’m in, we’re just assuming that both sides of this transactions have adopted into Amount B, but you are going to need to show that you are meeting the qualifications, so the quantitative qualifications as well as the qualitative quantification for Amount B in your documentation.

(08:37):
That’s not explicit in that February document, but I think it’s implicit. You need to show why a one-sided method is most appropriate. You’re going to need to show if you’re a multifunctional entity and you are carving out your distribution function, I think you’re going to need to show how you did. How specifically, and this I think is going to be the hardest part and the part we’ve been working with companies on is that if you’ve got a balance sheet and you are allocating out your balance sheet items for distribution versus manufacturing versus a bunch of other things you’re doing showing how you got to the allocation for that distribution segment, you’re going to need to show that because that’s going to point to where you are in the Amount B matrix.

Eman Cuyler (09:22):
How does that look if let’s say country one adopts Amount B and country B doesn’t adopt Amount B, then would you still have to do the traditional transfer pricing documentation that we’re used to seeing?

Jessie Coleman (09:35):
It’s a great question and some of this gets back to if one of them is a covered jurisdiction or not, but let’s assume neither are covered jurisdictions, so countries can choose to do what they want to. If one adopts and one doesn’t adopt, you’re going to need to do both, and some of it depends on how they adopt. If they adopt on a mandatory basis and if the other jurisdiction is not adopting the mandatory basis, you’re going to have to show how Amount B has been applied appropriately. For the one that hasn’t applied it, you’re going to need to show how your traditional transfer pricing was arm’s length. I don’t think this can work in that generally speaking, your Amount B return hopefully should be in the set of comparable companies. You can see how this from an economic perspective, this is doable, but from just a managing your documentation perspective, it’s going to add more right now.

David Farhat (10:35):
Jessie, I know all of us on this call may be in favor of the transfer pricing full employment act, but we can agree that there’s a lot of complexity not just in the technical but in the application. Again, last time we talked about shifting the debate from the comparables and the numbers from the quantitative to the qualitative, we’re saying, well, you’re not ending the debate, you’re just shifting it. It seems that still exists, but also now you’re layering on this jurisdiction by in jurisdiction implementation and interpretation piece that could get a bit more difficult. If we can unpack a little bit of that and go into what the jurisdictions want, so we’re talking about the US saying we want this mandatory, we have India on it. We have two poles, the US saying we want this mandatory and India is still having objections. Can you talk a bit about what may motivate some of that and why some of these jurisdictions are where they are?

Jessie Coleman (11:34):
Yeah, absolutely. The US has a very interesting dynamic in that they’ve been very supportive of Amount B for quite some time and have really worked really hard to actually put out the documents that we have seen. I think from the US perspective, they see a lot of controversy that they view as unneeded controversy surrounding these routine distribution functions. It would be absolutely great, and I think taxpayers would agree on this, is that if there was a way to push those off the table, that would certainly help. That way the competent authorities in the US could focus on harder cases, not more important cases, every case is important but just more difficult cases.

(12:25):
We see ATAF very strongly supportive of Amount B, and I think that’s also important. We can’t think of developing countries as just one, but certainly ATAF has spoken up for developing countries and said, “We think that Amount B is good.” That’s really in the perspective of developing countries don’t have a lot of resources. They struggle with analyzing transfer pricing, they don’t have databases sometimes. The databases that everybody has, they just don’t have. If we can make this easier for them, I think that would be a good thing. Australia and New Zealand say that they’re not supportive, but they don’t intend to adopt Amount B. We haven’t heard anything specifically from China, but often when you’re in a transfer pricing dispute there, you generally resolve it leaving a little bit more. You could see how those countries would feel on that.

Nate Carden (13:14):
If I was sitting listening to all this and trying to manage resources internally and let’s just suppose that I was an Amount A skeptic, call it. I’m hearing some countries don’t like the answer, some countries have come out against it, some countries have linked Amounts A and B. Is the answer that where this is really headed is I’ll do my transfer pricing documentation the same way I’ve been doing it before, the Amount B numbers are highly likely to be in the range and I just won’t worry about it and this just becomes a tool for competent authorities to resolve cases quickly or is there more to it than that?

Jessie Coleman (13:54):
I think there’s a little more to it than that, and I think it is a tool for competent authorities. I think the US has been very clear they view this as something they are going to, but I think what’s important is that maybe probably Amount B is in the range of results. Maybe your Amount B might be below what you are leaving in a jurisdiction. We’ve got a matrix essentially and a methodology that’s been published that says for a distribution entity with this level of operating expense and operating assets to sales, we expect it to be this number. I think we can expect that if a taxing authority is going to at least expect that you’re leaving that number in their jurisdiction, so it’s going to have to be a reference point. We look at distribution companies one to 5%, we see that a lot for return on sales, maybe you, company Y, are only leaving 1% in that jurisdiction. If you look at your Amount B matrix and it actually says you should be leaving two and a half percent, I think there’s a risk there.

(15:06):
If I was a company, I’d want to know what that risk is, especially in any material jurisdiction, I want to know what it is. The issue is in order to figure out what it is, you got to do the modeling and you got to peel back what your operating assets are and then you also have to peel back when you look at operating assets to make sure that the classification is correct because it gets into a lot of accounting questions as well here. I don’t think it’s a forget about it, I actually think it’s a strategically think about it right now. I don’t think you’ve got to think about it every single jurisdiction that you’re in, but if you’re leaving lower margins, I would 100% be thinking about what this means.

Nate Carden (15:52):
What if I find out I’m leaving a higher margin, should I drop immediately?

Jessie Coleman (15:58):
That’s an interesting point. Maybe you do, Nate. Not that you have to, but it does, it makes one think if that should be the answer that you do.

David Farhat (16:07):
Isn’t it a question of who you want to annoy at this point?

Jessie Coleman (16:10):
That’s equally true, or who don’t you want to annoy? Maybe that’s a better question.

David Farhat (16:15):
Precisely because we’re moving into a world where I think folks are less concerned about their effective tax rate and more concerned about avoiding double tax. Because if we’re looking at Pillar Two and we’re looking at TCGA and everything that happened, some of the planning that was available before isn’t available now and folks are looking at avoiding double tax. It sounds like from this conversation that this Amount B question raises the risk of double tax. Because if I’m operating in a jurisdiction that’s typically getting a higher return than what Amount B says they should get, I can see the jurisdiction on the other side saying, “Nope, I’m looking at Amount B, this should go down.”

(16:55):
They would say, “Listen, I’ve traditionally gotten this, it’s within the range. This is what I want to get.” Then you have a fight. As opposed to Amount B shortening the competent authority process, I think it could exacerbate that controversy. Because now the US gets this Amount B number to waive and say, “No, you should be at this level.” This country says, I know we have several of these countries in our mind, some of the objectors Australia and so on will say, “No, I’ve always gotten X. I’m not taking X minus.” How do you fix that?

Jessie Coleman (17:29):
I don’t know, go to a competent authority, David, is that how you’re going to fix it? I’m not joking, maybe that is how. It’s you’re under the same mechanism as you are now to fix those disputes. David Farhat (17:39):

Absolutely, and I’m thinking if you don’t have an arbitration provision in your treaty, what happens? Because I can see you don’t have agreement just on what the rules should be, whether they should be mandatory, whether they should be elective, whether they’re a safe harbor. Now you go to the competent authorities and it’s just, you’re changing the forum for the fight as opposed to helping the fight. Because I think a lot of folks nowadays will say, “Yes, we go to competent authority more often, but I’m finding competent authority not being as agreeable as they used to be.” Let’s use that term because I think post pandemic, a lot of folks have seen a lot of the tax authorities get a bit more aggressive and competent authority not going as smoothly as it did before. While Amount B is supposed to be a tool to help that process, it sounds like Amount B could cause a bit more friction.

Jessie Coleman (18:30):
I mean, it could. It’s interesting though with this covered jurisdiction aspect, David, that might help. For the covered jurisdictions, which are a list of jurisdictions that they have in this June guidance, it basically says you’re going to counter party, you will accept the Amount B result. In that respect, I’m hopeful, I’m always hopeful, I’m like, optimistic type of person. I am hopeful that we’ll take some disputes off the table to start with. I think you’re still going to have the competent authority issue. I don’t know how you resolve that issue that you’re talking about though. If incompetent authority, if somebody has a point in mind within the arm’s length standard that is based on Amount B, how do you move them off the point? I just don’t know.

Stefane Victor (19:17):
Would you say the primary thing frustrating the aim to streamline existing transfer pricing procedures is the fact that not every country is signing on or is there an additional rub that makes it difficult for companies?

Jessie Coleman (19:33):
That’s a good question. Not knowing who’s signing on, that’s a huge issue and that is going to make it complicated. If you look at the document, there’s other complications that are going to creep in there, specifically this concept around scoping. Will jurisdiction agree that an entity is in scope? I thought there was going to be additional guidance that was going to talk about qualitative scoping, so that would help. We don’t have that. There is also added complexity just in how to calculate some of the numbers and how there is an operating expense to sales cross check mechanism and there’s some questions about how that would mechanically work as well. I think that’s more technical complexity about how Amount B works. Hopefully, there’ll be some administrative guidance. We understood that some was coming, although it might come in the form of like an FAQ, which wouldn’t be formal guidance, it would be more of an OECD document that comes out.

Eman Cuyler (20:34):
As we’re moving forward and basically looking into 2025 for companies that might or would likely be within scope, do you have any tips of what they should be doing right now to prepare?

Jessie Coleman (20:46):
Yeah, I think doing the work to see what their Amount B numbers are. It’s interesting, and the way the February document worked is that a lot of things are keyed off on the past three prior years. If a jurisdiction did implement on January 1st, 2025, for example, your operating assets to sales, which is going to drive where you are in this matrix, it’s based on the 2024, 2023 and 2022 asset balance. It’s pretty important that companies look at where they are right now and also, make sure that there’s no kind of misclassifications, I would say, or confusions on that. I think knowing the unknown right now, I think is really important. I think just actively monitoring to what the counter jurisdiction is going to do or maybe what all jurisdictions are going to do as well. Of course, monitoring what else is coming out because we still know more is coming out.

Nate Carden (21:46):
How are you advising folks with respect to transactions where the US doesn’t have a treaty partner and so you’re subject to domestic 482 rules?

Jessie Coleman (21:56):
Transactions where the US doesn’t have, so what does the US operations here?

Nate Carden (22:01):
Let’s say that the US is the headquarters and you’re operating in Brazil or Singapore or any other place where you think you have distribution and you therefore need transfer pricing documentation, but you’re not in a treaty jurisdiction and so therefore the OECD guidelines don’t apply, 482 does.

Jessie Coleman (22:24):
Got it. Well, for Brazil, the Brazilian regulations apply, not 482.

Nate Carden (22:29):
Well, you have to document from a US perspective. What do you put in your doc?

Jessie Coleman (22:35):
What do you put your doc? It depends on how the US adopts. If the US were to adopt either on a safe harbor basis, because I don’t think they can adopt on a mandatory basis right now, you could put in your doc what the Amount B return would be for Brazil. I’m using US Brazil here as an example. We know that the US is pretty supportive if they adopt. I think the question will be you still want to make sure Brazil is leaning towards adopting here, so maybe they’re a bad example here. Another country, Argentina, we’ll say. I know Argentina is thinking of adopting here too. Sorry.

Nate Carden (23:13):
Australia.

Jessie Coleman (23:14):
We have a treaty though, so that doesn’t work.

David Farhat (23:16):
Let’s just say Country X.

Jessie Coleman (23:18):
Country X, sorry, with no treaty. I think you’d want to look, if one is going to adopt and one is not going to adopt, then you’re going to need to show anybody who’s adopting, you’re going to need to show that Amount B is giving an appropriate Amount B return. Anyone who doesn’t adopt, you’re going to need to show that it’s an arm’s length basis. In your example, is Country X, have they adopted or not adopted?

Nate Carden (23:43):
Let’s say they’ve adopted.

Jessie Coleman (23:44):
Okay, so Country X adopted, we know the US is fairly supportive.

Nate Carden (23:49):
We haven’t seen any regulations though.

Jessie Coleman (23:53):
That is the crux of it. We’re still under the 482 guidelines.

Nate Carden (23:55):
What does supportive mean? There’s lots of things where the US makes statements but then they don’t act.

Jessie Coleman (24:02):
That’s fair. I think in that respect, what you would need to do is from a US side, you would need to do a full comparable search at present unless something changes and something comes out as guidance of some sort. You’d need to do a search for comparables, show how Country X as within the range. For Country X, you’re going to apply Amount B. I’m going to hope that the Amount B is within the arm’s length range. Essentially, you’re going to be documenting it two different ways for each country. You can have one report that documents it in both ways, but you’ve got two sets of documentation here.

Nate Carden (24:40):
It’s kind of what I figured. Is this helping anybody? I have to document now two ways across two jurisdictions. What is this doing for people and why is the US so supportive given that the primary thing it’s doing seems to be to increase workload?

Jessie Coleman (24:59):
I often just taking a step back, don’t think that when rules are created, increasing the workload of companies is something that’s always considered, Nate, just as an aside. I do think the US is supportive, I think very much so on the competent authority side. They really view this as a way to streamline the discussions they are having with jurisdictions. In your case, I guess if we had a treaty in this case, which you don’t, it would be a faster path to a competent authority negotiation.

David Farhat (25:31):
On that, I could see how that would happen if you have both jurisdictions on the same side with regards to Amount B. Because if everyone accepts Amount B, whether it’s voluntary or mandatory, and you say, “Okay, we’ll take Amount B.” That could streamline, but I get the sense that for the folks that the competent authority are having some of these difficult discussions with, they’re not necessarily on the same page with Amount B as the US is. Like I said, exacerbate some of that tension.

Jessie Coleman (26:04):
Agreed. Just because the US wants to use it at competent authority, that doesn’t mean it’s counterparty has to use it.

David Farhat (26:10):
Absolutely.

Jessie Coleman (26:11):
There’s no guarantee. Yes, we’re apparently in a world of complexity and controversy. Thank you for that. My optimism has been pushed back. I appreciate that.

David Farhat (26:22):
I’m always glass half full. That’s what they say about me. Because again, I’ve heard John Wall make some comments about this and streamlining competent authority, which I think is a good thing. Because if we can get some quicker competent authority resolutions, especially some of these “simpler cases,” that’d be a good thing. It’s just I am a bit worried with the US’s enthusiasm for this that some of their treaty partners may not share the same enthusiasm.

Nate Carden (26:52):
If you actually get past the point where you agree that the activities are baseline and that you have a one-sided method and you agree with respect to classification of P&L and balance sheet items such as that the segmentation is done, but then you turn to comps, how much work is really left? That’s a different way of asking how much is the Amount B matrix actually helping speed the cases up? Because my instinct is that a lot of the hard work is still there, but maybe that’s not right. What do you think?

Jessie Coleman (27:29):
It’s work to do the comparable searches. I don’t think it’s no work to do the comparable searches. I think it’s interesting. I think your question is, is the time spent doing the Amount B analysis, is that less than doing a comp search?

Nate Carden (27:45):
Good way to put it.

Jessie Coleman (27:46):
I would think that the Amount B work, once you set it up in a system, it’s actually pretty straightforward. It’s like classifications looking at your industry, looking where you are once it’s set up. Getting it setting up is going to be a whole another story. If you take that aside, I think that’s going to be much more streamlined. I think you would save work there. You might not save work, David, to your point about potential controversy on this, but if we take that aside. I think there is some savings of time, although it’s interesting on the controversy side, I’m sure David and Nate, you guys have been in discussions with governments arguing over comparables. It’s not like you do a comp set and everybody agrees with the comp set either.

David Farhat (28:31):
Absolutely.

Jessie Coleman (28:32):
There’s controversy there. I do think though, just putting a plug for the reason this was designed for developing countries, I think this could help them a lot still. Taking it away from the taxpayer, putting in effort, we’ve got a country and getting access to the database is going to be a lot of money. Hiring transfer pricing professionals is going to be a lot of money. This could be a win for them. I see a win there and a time savings there and a money savings there.

David Farhat (29:01):
That’s a great point. A lot of the stuff we do, we don’t think about that side of the equation a lot of times. I do appreciate that point and if we can have a time saving there, there’s a benefit to it. Sorry, Stefane, go ahead.

Stefane Victor (29:13):
For companies working on thinner margins and for whom the additional documentation accompanying Amount B is especially burdensome, is there a way to scope out of Amount B such that they can bypass a lot of this headache?

Jessie Coleman (29:28):
There are ways to be out of scope, so there’s a quantitative way to be out of scope and that’s an operating expense to sales. You can scope out too, there’s a discussion about pass-through expenses, so kind of flow-through expenses. Maybe you’re a distribution entity and maybe you wind up paying for marketing expenses that really aren’t your marketing expenses, they’re just being pass through. There is an argument that you can look at a quantitative side and see if you could pull out the pass-through expenses and maybe you get below the threshold, so you could scope out in that way. Another way to think about the scoping is that since we don’t have a detailed discussion about scoping, I think it’s also possible a company could make an argument that they’re not technically in scope. I don’t think they can make an argument though that we just don’t have high enough returns to be in scope though.

(30:25):
I think that’s actually is an issue though. If you’re a company that earns 3% margins and your Amount B, consolidated, you in 3% margins and then your Amount B said you should be at 3%, you got to scratch your head because that means there’s $0 left for the rest of your value chain. There is some kind of the cross-check mechanism I mentioned, like the operating expense to sales is supposed to help this. It doesn’t quite get there for some companies and I think that’s going to be a huge headache if we’re in a mandatory Amount B and you are that company. It doesn’t get you out of scope, that’s the issue. Just because you don’t make a lot of money, doesn’t mean you’re like, “Peace out, Amount B is not for me.”

Nate Carden (31:07):
Switching gears a little bit. Have you started to see anyone think about, and I’m curious as to how you think about other uses for Amount B, for example, the reduction in for routine returns if you buy an entity that has IP and you’re trying to value that IP? The way people often do that is you take the total price of the entity and then you subtract off all the routine returns. I could imagine saying, “Look, here’s the Amount B number for our industry group and for the combination of operating asset to sales ratios that we see across the jurisdictions. I’m just going to use the Amount B number rather than a benchmarked return.” There are lots of different ways that routine returns come into transfer pricing, and I’m wondering how you think Amount B is going to impact that either from an enforcement standpoint or just from a theory and practice standpoint.

Jessie Coleman (32:06):
It’s an interesting point. It can be a proxy for what your routine return should be. It’s funny, we’ve used it once or twice, but just really because we haven’t had the set yet. We’ve done an analysis and we just were like, “Well, we’ll take Amount B for now, but we’re going to go back and do a comparable search.” I think as a shortcut, it’s helpful. Although to be frank, we’re not doing the full Amount B calculation. Also, to be frank, what a routine distribution entity should earn, I’ve seen dozens and dozens and dozens of sets, Nate. It’s not like I don’t need Amount B basically to show me an approximation. We have used some concepts in Amount B.

Nate Carden (32:45):
Could you use it affirmatively? If you like amount B a lot better than the dozens and dozens and dozens of sets, could you use that or is your answer, you know what, I can almost always find a comp set that includes Amount B almost by design?

Jessie Coleman (33:02):
I think probably the latter, to be frank. Because Amount B is within a range of every point is within a range of.

Nate Carden (33:11):
Somebody’s comp set.

Jessie Coleman (33:13):
Yes. We’ve used it, some parts of it, so they’ve changed the name of it, but essentially, it’s like a country uplift based on credit rating. We did use that. Brazil in their transfer pricing, they say you should use domestic comparables, you should consider if adjustments are made. They have an example in their normative instructions that is not prescriptive. Here’s an example. I’ve used an Amount B approach for Brazil comparables for that uplift simply because we know Brazil is supportive of Amount B. It’s a bit of an easier calculation. I’ve used it in that way, although that’s not the number, that’s just the approach.

Nate Carden (33:56):
The upshot is if you look at all this, and if we look back on it 10 years from now, is Amount B going to make things more formulaic, even if not simpler? Figure out your operating assets, figure out your operating expenses, segment your balance sheet, segment your P&L, et cetera. There may be a lot of steps and your quantitative screens idea was super interesting to me. Is that just the direction we’re headed, do you think?

Jessie Coleman (34:30):
I don’t know. I don’t know if we have enough agreement right now that Amount B is like, I don’t think we have the agreement we would need to say that’s the direction of travel. Also, personally, as a transfer pricing professional, the devil is always in the details. It’s always about knowing your company, knowing the functions, assets and risks. I just don’t think that’s going to go away.

David Farhat (34:53):
Jessie, one last question. If the whole transfer pricing world were to come to you and say, “Jessie, how should we handle this Amount B thing,” what would be your guidance?

Jessie Coleman (35:03):
The whole transfer pricing world, like all transfer pricing clients. Are we talking about companies, are we talking about the countries? It’s the inclusive friend, we’re coming to Jessie Coleman.

David Farhat (35:12):
Everyone coming to Jessie Coleman and saying, “You’re the sovereign. You tell us what we should do with this Amount B thing.” What would you do?

Stefane Victor (35:20):
She’d be able to retire very early. That’s what she would do.

Jessie Coleman (35:22):
That’s very true. I honestly think if we get back, and this also, I spent some time doing developing country work. I think maybe my answer gets back to my own personal thought that I think that Amount B, if designed correctly and appropriately, I think it can help developing countries who desperately need it. I also think it can help companies. I think this could be a very, very good thing. I would say we’re not quite there with what we have. If we could put in place a mandatory Amount B, so we stop that question about if you’re applying or not applying, if we could have a lot of clarifications about what things are and make it so that it actually is simple and streamlined and clear. I still think this could be a huge win for taxpayers and then for countries too. You can tell me, I’m a complete optimist here, I get that, David. Feel free.

David Farhat (36:24):
Not at all. That’s part of why we love you, Jessie. Thank you so much for coming on again. Once again, this has been GILTI Conscience. Thanks for listening.

Voiceover (36:34):
Thank you for joining us for today’s episode of GILTI Conscience. If you like what you’re hearing, be sure to subscribe in your favorite podcast app so you don’t miss any future conversations. Skadden’s tax team is recognized globally for providing clients with creative and innovative solutions to their most pressing, transactional, planning and controversy challenges. Additional information about Skadden can be found at skadden.com.