Notice 2025-04 issued by the IRS marks significant progress in implementing Amount B of the inclusive OECD framework. This approach aims to simplify and optimize Transfer Pricing, particularly in marketing and distribution activities, providing clarity and reducing tax disputes.
The Role of the Amount B and the Simplified SSA Approach
Amount B is designed to standardize Transfer Pricing in marketing and distribution activities. Based on the Simplified Streamlined Approach (SSA), this method allows for an automated allocation consistent with the Arm’s Length Principle.
According to the IRS, the SSA facilitates tax compliance by eliminating the need to apply complex traditional methods and establishing a “safe harbor” for certain transactions. In addition, Amount B complements Amount A, which reallocates profits of multinational enterprises (MNEs) to market jurisdictions, even when they are not physically present.
Conditions for Applying the SSA
For a transaction to be eligible under the SSA, certain requirements must be met:
- Transactions must contain marketing and distribution activities, such as controlled purchase and sale or sales agency, targeted to unrelated parties.
- The taxpayer must confirm that the relationship between operating expenses and income meets the established criteria.
- A formal declaration to opt for the SSA must be filed simultaneously with the tax return.
OECD Automation Tool
In order to facilitate the implementation of the SSA, the OECD has developed an Excel tool that automates calculations related to Transfer Pricing. Conversely, this tool has limitations, as it does not address all of the qualitative criteria necessary to comply with the IRS rules completely. Taxpayers should complement it with detailed documentation supporting the grounds of the methods applied.
Benefits and Risks of the SSA
The SSA promises significant advantages for compliant businesses, such as reduced tax disputes and simplified tax compliance. In addition, the IRS will not penalize if taxpayers demonstrate that they have properly followed the process and maintained the required documentation.
Conversely, the IRS cautions that improper application of the SSA may result in penalties. Therefore, companies must carefully evaluate whether this method is the most tax-beneficial and aligns with their overall tax strategies.
Considerations for Taxpayers
The SSA is considerably valuable, but it depends on its global adoption and how jurisdictions work together to ensure results consistent with the Arm’s Length Principle. Taxpayers should:
- Evaluate tax rates in other jurisdictions before opting for the SSA.
- Maintain detailed documentation to support the chosen method.
- Monitor regulatory updates to ensure continued compliance.
Conclusion
IRS Notice 2025-04 and the implementation of Amount B reflect a joint effort by the United States and the OECD to simplify and harmonize international taxation in an increasingly complex tax environment. Although the SSA looks attractive in terms of reducing tax disputes, companies must adopt a proactive and cautious strategy to maximize their benefits and minimize risks. Proper preparation will help to navigate this new regulatory framework.
Call to Action
At TPC Group, we can help you understand and comply with the new Transfer Pricing regulations.
Source: Caplin & Drysdale