In December 2024, the US Treasury Department issued Notice 2025-04 (the IRS Notice), announcing its intent to issue proposed regulations and other guidance on applying the OECD’s simplified and streamlined approach (SSA) method for pricing certain controlled transactions involving baseline marketing and distribution activities. The approach for pricing these activities by applying the SSA is described in a report issued by the OECD titled Pillar One – Amount B: Inclusive Framework on BEPS and published on February 19 2024 (the Report).
The IRS Notice states that taxpayers subject to US taxation on in-scope transactions may rely on the notice and elect to apply the SSA for tax years beginning on or after January 1 2025.
The IRS Notice
The IRS Notice describes the SSA as a means to determine a return based on comparables that is sensitive to material factual differences between the comparables and tested parties. As a result, the IRS Notice states that “the SSA is expected to closely approximate the result under the best method in most cases, and material differences in the results (under the SSA versus the best method), if they occur, are further expected to be minimal and uncommon”.
The SSA is intended to alleviate administrative burdens, reduce compliance costs, decrease the likelihood of lengthy, expensive, and unnecessary cross-border tax disputes, and resolve more efficiently any disputes that nonetheless arise, thereby increasing tax certainty for tax administrations and taxpayers. Accordingly, to the extent that the SSA may be less reliable than the best method in some cases, the IRS Notice states that any reduction in reliability is expected to be modest and offset by the benefits of simplification and streamlining arising from the SSA.
The SSA is similar to the comparable profits method described in US Treasury Regulation Section 1.482-5 and the controlled services analogue in US Treasury Regulation Section 1.482-9(f). The Report states that every jurisdiction may choose whether to implement the SSA. A jurisdiction that implements the SSA may choose from two options:
Under Option 1, the SSA can apply only if, among other considerations, a taxpayer elects for it to apply.
Under Option 2, a taxpayer can elect to apply the SSA as under Option 1, but the tax administration of the distributor country that has implemented the SSA also has the right to apply the SSA even if the taxpayer does not elect to apply it. Under both options, taxpayers retain flexibility when structuring their transactions to fall within or outside the scope of the SSA.
The IRS Notice states that the Treasury Department and the IRS intend to issue proposed regulations that, at a minimum, will be consistent with the Option 1 version of the SSA, which would permit taxpayers that are subject to US tax with respect to in-scope transactions (that is, both US distributors and US related suppliers) to elect (as described in Section 4.06 of the notice) to apply the SSA for taxable years beginning on or after January 1 2025. The IRS Notice states that the Treasury Department and the IRS will consider whether proposed regulations should also permit the IRS to apply the SSA to in-scope transactions in a manner consistent with Option 2.
Implementation
The IRS Notice states that for US taxpayers, the process of applying the SSA with respect to a controlled transaction will require the following:
The controlled transaction must be within one of the categories of qualifying transactions.
If the transaction is a qualifying transaction, it must also be an in-scope transaction. For purposes of determining whether a qualifying transaction is an in-scope transaction, the upper bound of the operating expenses-to-revenues scoping criterion in paragraph 13.b. of the Report is 30% if (a) the distributor is a US distributor or (b) the distributor’s country has not adopted the SSA. If the distributor is not located in the US, and the distributor country has adopted the SSA, then the upper bound is the one specified by the law of the distributor country, but this upper bound can be no lower than 20% and no higher than 30%.
If the qualifying transaction is determined to be an in-scope transaction, then to apply the SSA for US tax purposes, an election would need to be made as described in the IRS Notice.
The taxpayer must maintain permanent books of account and records that are adequate to permit verification by the IRS that the controlled transactions with respect to which the election is made are in-scope transactions and must maintain sufficient documentation to allow verification that the taxpayer properly determined its income under the SSA. The recordkeeping requirements state that taxpayers must keep books of account and records that are adequate to permit verification that the controlled transactions are within scope, that the SSA has been properly applied, and that the taxpayer is reporting the correct amount of taxable income. These requirements supplement the existing requirements in US Treasury Regulation Section 1.6662-6.
The SSA will not be considered the best method if the parties to the transactions or either taxing authority demonstrate that the comparable uncontrolled price method is more reliable. In addition, the IRS may still audit the taxpayer regarding whether:
An intercompany transaction is in-scope;
The taxpayer's election is valid; and
The taxpayer's income allocations are properly calculated under the SSA.
If a taxpayer uses the SSA but fails to meet one or more of the requirements of the IRS Notice, the IRS will consider this to be an application of an unspecified transfer pricing method under the US transfer pricing regulations, US Treasury Regulation Section 1.482-1(c)(2), which states: “The arm's length result of a controlled transaction must be determined under the method that, under the facts and circumstances, provides the most reliable measure of an arm's length result. Thus, there is no strict priority of methods, and no method will invariably be considered to be more reliable than others. An arm's length result may be determined under any method without establishing the inapplicability of another method, but if another method subsequently is shown to produce a more reliable measure of an arm's length result, such other method must be used. Similarly, if two or more applications of a single method provide inconsistent results, the arm's length result must be determined under the application that, under the facts and circumstances, provides the most reliable measure of an arm's length result.”
Observations
The IRS amount B notice represents a significant step towards making transfer pricing compliance uniform on a global basis. If amount B is adopted on a broad scale in the coming years, it has the potential to reduce the cost and complexity of transfer pricing analysis for taxpayers and tax administrations alike.
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