OECD publishes additional guidance on the S&S Approach (Pillar One Amount B)

The return on sales (RoS) remuneration for BMDA shall under the S&S Approach in principle be determined through the Pricing Matrix by assessing the tested party's (i) net operating asset intensity (OAS), (ii) operating expense intensity and (iii) industry group. The return provided in the Pricing Matrix will be considered acceptable within a range of plus or minus 0.5%.

The Operating Expense Cross-Check serves as a safeguard within the S&S Approach to ensure that the RoS remuneration derived from the Pricing Matrix falls within an acceptable range and entails the following four-step process: 

• Step 1 – the tested party determines its RoS based on the Pricing Matrix and computes an equivalent Return on Operating Expenses (RoOE) derived from that return.
• Step 2 – the tested party determines the applicable operating expense cap-and-collar range. Tested parties can either be subject to default cap rates or alternative cap rates for ‘Qualifying Jurisdictions’. Also, the OAS of the tested party is considered in this step.
• Step 3 – the tested party compares the equivalent RoOE against the operating expense cap-and-collar.
• Step 4 – where the equivalent RoOE of the tested party exceeds the operating expense cap, the RoS of the tested party will be adjusted downwards until it results in an equivalent RoOE equal to the operating expense cap.

The Data Availability Mechanism provides under certain circumstances for upward adjustments to the RoS remuneration derived from the Pricing Matrix and the Operating Expense Cross-Check where applicable. The mechanism is intended to account for cases where there is no or insufficient data in the global dataset for a particular tested party jurisdiction to validate the appropriateness of the Pricing Matrix coupled with evidence that that jurisdiction could be reasonably considered a ‘higher risk’ jurisdiction. Sovereign credit ratings are used as a proxy to determine ‘higher risk’ jurisdictions and to quantify the applicable adjustment under the mechanism. The upward adjustment is determined by multiplying the following variables:

Where —

• NRA is the net risk adjustment percentage of the Qualifying Jurisdiction derived from a table where the applicable cell is determined by reference to the sovereign credit rating of the Qualifying Jurisdiction of the tested party applicable on the first day of the relevant fiscal year.
• OAS is the OAS of the tested party for the relevant fiscal year, but this OAS will not exceed 85% for the purpose of computing this adjustment.

In Step 2 of the Operating Expense Cross-Check, tested parties can either be subject to default cap rates or alternative cap rates, with the latter applicable when the tested party is located in a ‘Qualifying Jurisdiction’. The list of Qualifying Jurisdictions within the meaning of the Operating Expense Cross-Check will be fixed prospectively, published and updated every 5 years on the OECD website. It should be noted that the list of Qualifying Jurisdictions does not imply that the listed jurisdictions are obligated to adopt or will adopt the S&S Approach.

According to the June Guidance, only non-European Union jurisdictions with (i) a publicly available long term sovereign credit rating of BBB+ (or equivalent) or lower from a recognized independent credit rating agency, and (ii) less than 5 comparables in the global dataset are considered to be Qualifying Jurisdictions within the meaning of the Data Availability Mechanism. The list of Qualifying Jurisdictions within the meaning of the Data Availability Mechanism will also be fixed prospectively, published and updated every 5 years on the OECD website. Additionally, it should be noted that the list does not imply that the Qualifying Jurisdictions are obligated to adopt or will adopt the S&S Approach.

The Report stated that IF members commit to respect the outcomes determined under the S&S Approach for in-scope transactions when applied by a low-capacity jurisdiction. They also agreed to take all reasonable steps to relieve potential double taxation arising from the S&S Approach, provided there is a bilateral tax treaty in effect between the relevant jurisdictions. With respect to this commitment, the June Guidance no longer refers to a ‘low-capacity jurisdiction’ but uses the neutral term ‘Covered Jurisdiction’ to allow for a broader application. The June Guidance mentions that the replacement of ‘low-capacity jurisdiction’ with ‘Covered Jurisdiction’ follows the extension of commitment to certain low- and middle-income OECD and G20 members. This extended political commitment relates in particular to low- and middle-income OECD and G20 member countries that expressed their willingness to apply Amount B before March 2024 (e.g., Argentina, Brazil, Costa Rica, Mexico, and South Africa). 

The June Guidance mentions that the inclusion of any additional countries in the list of Covered Jurisdictions for the IF political commitment will be subject to approval by the IF but may be requested by any non-IF member meeting the criteria. Besides the review of the list every 5 years, IF members are free to extend their political commitment to any other IF or non-IF member on a bilateral basis.