The U.S. Department of the Treasury and IRS (collectively, “Treasury”) on December 18, 2024, published a Notice 2025-04 (“Notice”) and announced their intent to issue proposed regulations and other guidance on applying the Simplified and Streamlined Approach (“SSA”) method of the Organization for Economic Co-operation and Development (“OECD”) for pricing certain controlled transactions involving baseline marketing and distribution activities.
Taxpayers subject to U.S. tax on in-scope transactions may rely on the Notice and elect to apply the SSA as an elective safe harbor for tax years beginning on or after January 1, 2025. The Treasury intends to implement the substance of the OECD’s February 2024 report on Pillar One Amount B (“the Report”), including supplemental statements released in June 2024 (“the Statements”), in its entirety. The IRS has requested comments to be submitted on the Notice by March 7, 2025.
According to the Notice, the SSA is similar to the comparable profits method under Treas. Reg. Sections 1.482-3(a)(4), 1.482-5 and 1.482-9(a)(5) and (f). The Notice specifies how to apply SSA for U.S. tax purposes. Specifically, the Notice describes the identification of the relevant matrix cell, operating expense cross-check, data availability mechanism for qualifying jurisdictions, and qualifying jurisdictions for purposes of Sections 5.2 and 5.3 of the Report. All these aspects are defined and explained in detail in the OECD Report and Statements.
Application of the SSA By U.S. Taxpayers
The Notice has also provided the following clarifications on the application of the SSA by U.S. taxpayers:
- The SSA would apply as an elective safe harbor for taxpayers, i.e., taxpayers could elect to apply it but could not be mandated to apply it by the IRS.
- Taxpayers can elect to apply the SSA to any qualifying, in-scope transaction. Qualification is established based on the criteria outlined in the OECD report on Amount B and the operating expense to net remuneration. This means that taxpayers have significant flexibility in the transactions to which they do or do not choose to apply the SSA. The SSA is an annual election; so there is no requirement to apply the SSA consistently from year to year.
- The SSA can be applied to transactions between U.S. Distributors and Foreign Related Party Suppliers, or U.S. Related Party Suppliers and Foreign Distributors. In both circumstances, the application of the SSA may not be respected in the foreign jurisdiction if the foreign jurisdiction has not also adopted the SSA.
- The SSA would apply to transactions where a distributor’s operating expense to net revenue are between 3% and 30% for U.S. Distributors or Distributors in foreign jurisdictions that have not adopted the SSA. In foreign jurisdictions that have adopted the SSA, then the upper bound operating expense to net revenue ratio is established by that jurisdiction’s domestic legislation. The OECD report set the upper bound of this threshold at between 20% and 30%, and hence, as a default, Treasury has selected the highest possible threshold.
- Taxpayers must elect to apply for the SSA by making a statement in their original tax return identifying the transactions to which they intend to apply for the SSA. This must include a basic description of the transaction, identify the counterparties to the transaction and the jurisdiction where the entities are incorporated (or tax resident, if different from incorporation).
- Taxpayers are required to maintain certain documentation relating to the application of the SSA, both to enable the IRS to verify that it has been applied properly and to avoid penalties under Treasury regulations section 1.6662-6. The Notice also amends the documentation requirements that will apply to transactions covered by the SSA. These amendments relax some requirements, for example, around method selection, but also impose new requirements, such as maintaining copies of intercompany agreements between the Distributor and its Related Supplier.
This simplification of marketing and distribution activities will primarily be relevant for multinationals with baseline marketing and distribution activities, i.e., limited risk distributors (LRDs) in the U.S. The Notice provides an elective safe harbor for taxpayers, who, by complying with the SSA, will be able to limit their risk of transfer pricing dispute in the U.S. from tax years starting January 1, 2025. It may also provide a framework through which taxpayers could seek greater certainty through the bilateral advance pricing agreement process. Treasury has been a major advocate for Amount B since its inception, believing it has the potential to significantly reduce the disputes that U.S. multinationals face in other jurisdictions over the pricing of baseline marketing and distribution activities. However, that view, of course, could change under the incoming administration, so feedback provided by stakeholders on this Notice has the potential to be very impactful.
It is also notable that the proposed regulations do not depend on other countries adopting Amount B or even on a critical mass of countries adopting Amount B. The Treasury and IRS seem to be committing to some application of Amount B regardless of what other countries decide to do. If other countries take a contrary position on Amount B, a potential systemic double tax remains a possibility.
Takeaways
Businesses that are potentially in the scope of the SSA may need to review whether they have the information required to apply the framework and what the framework looks like in comparison to their current transfer pricing policies. While the SSA scoping and pricing methodology appears to be straightforward, limitations such as data segmentation and narrow permitted ranges remain a concern. On the other hand, the application of SSA represents an opportunity for U.S. taxpayers to get greater certainty on the transfer pricing of their U.S. marketing and distribution activities, thereby reducing some of the compliance burden associated with preparing and updating the benchmarking analyses.
Authors: Andrew DeSimone | [email protected] and Mukul Chhabra | [email protected]
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