The OECD has published a model tax treaty to fix the taxable profit of companies 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.
Unfortunately, Amount B does not fit in well with the new Israeli "trapped profits" amendment, as explained below.
About Amount B
The Amount B “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, which is a lot faster than traditional transfer pricing studies. However, detailed rules apply and the calculations are complex.
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. So if the import country accepts the resulting transfer price, the model agreement also helps the export country accept the corresponding transfer price at its end.
The agreement says if the simplified and streamlined approach is used, the Amount B return for qualifying transactions, will be treated as providing an acceptable approximation of an "arm’s length" (market-based) 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 should 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 will apply to qualifying transactions on or after January 1, 2025 or the month after both countries sign off, if 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?
Currently, only around 66 countries are signed up “covered jurisdictions” including Mexico, South Africa, Ukraine and Vietnam and others - mainly developing countries. The EU and most other affluent western countries are not covered jurisdictions. But 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.
Also, the OECD says such an agreement is optional, and does not impede the use of “other means” (presumably transfer price studies or individual taxpayer agreements) or agreement with countries not on the “covered jurisdiction” list.
On balance, businesses and tax administrations may find the new rules very helpful in fixing their own tax bill – in the US and many other countries. Distributors may choose between Amount B or a transfer pricing study for each country.
What about Israel?
Israel is an OECD member but is not a covered jurisdiction for Amount B purposes. So the Israeli Tax Authority (ITA) may or may not accept Amount B calculations from Israeli importers and exporters.
Trapped Profits Amendment Problems:
The recent "trapped profits" amendment complicates everything international in Israel.
The amendment now imposes up to 50% Israeli tax on Israeli resident individual shareholders in private companies that make active or passive profits, including distribution profits.
If an Israeli individual holds 100% of a foreign company, then 75% - 100% of foreign profits may be sucked into the Israeli tax and taxed at 50% at the shareholder level, including the OECD's Amount B.
The amendment also taxes undistributed profits of Israeli companies, including Amount B apparently.
Even Olim (immigrants) in their ten year tax benefit period are not spared, apparently.
So the OECD's Amount B is second rate for many in Israel. Israel's tax treaties were generally not designed for this. Will double taxation ensue?
All in all, this is so serious that this author (email below) is arranging seminars in Jerusalem, Tel-Aviv and Haifa on February 6,11 & 17 to explain what's in the amendment and what to plan.
As always, consult experienced tax advisors in each country at an early stage in specific cases. leon@hcat.co
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax.