On December 18, 2024, the IRS in the U.S. issued Notice 2025-041 (Notice) to announce that the U.S. Department of the Treasury (Treasury Department) and the IRS intend to introduce proposed regulations that provide a new simplified and streamlined approach (SSA) for pricing certain controlled transactions involving baseline marketing and distribution activities, as described in a report of the Organisation for Economic Co-operation and Development (OECD) titled “Pillar One – Amount B: Inclusive Framework on BEPS”2 and published on February 19, 2024 (Report).
Potential Implementation of the SSA by the IRS & the Treasury Department
The Notice indicates that the proposed regulations will likely implement the substance of the Report in its entirety, although it does not restate or address every element of the Report. Key highlights from the Notice include:
- U.S. distributors or U.S. related suppliers will likely be able to make an election to apply the SSA.3 Nevertheless, the Treasury Department and the IRS have not fully ruled out the possibility of requiring the use of the SSA in a prescriptive manner.
- A U.S. taxpayer (either a U.S. distributor or a U.S. related supplier) would elect to apply the SSA on a timely filed tax return with a statement titled, “Election to apply the SSA,” containing required information about the relevant controlled transaction(s) for the reporting tax year. Currently, there is no template developed by the IRS for such statements.
- The Notice indicates that the IRS intends to allow the election of the SSA on a transaction-by-transaction and taxable year-by-taxable year basis but also is evaluating the necessity and reasonableness of potential alternative options.
- The definitions of the qualifying transactions and in-scope transactions, as well as the general SSA application/calculation process to identify the appropriate return on sales for distributors, are generally consistent with such information in the Report.
- The potential inconsistencies between jurisdictions’ policies on the SSA may lead to double taxation disputes and other issues. For example, even if a taxpayer is permitted to support the use of the SSA under the Mutual Agreement Procedure, the competent authority of one government cannot support the taxpayer’s position based on the SSA if the other government has not adopted or agreed to accept its application.
- The Notice details the documentation requirements for applying the SSA, which replace the requirements outlined in Treasury Regulation Section 1.6662-6(d)(2)(iii)(B) and (C).
- The Notice allows for voluntary election of the SSA for taxable years beginning on or after January 1, 2025, before proposed regulations are published in the Federal Register.
Request for Public Consultation on the Notice
The Treasury Department and the IRS request comments from interested stakeholders on this Notice, as the proposed regulations are still a work in progress. Comments on all SSA-related topics addressed in the Notice are solicited, with a focus on options in the SSA implementation and options for the election to apply the SSA, as well as the OECD threshold for in-scope transaction determination. The deadline for submitting comments is March 7, 2025. Given the new U.S. presidential administration, the positions that the Treasury Department and the IRS take toward Pillar One Amount B and the SSA may change, so the comments from the public stakeholders on the Notice will be critical in shaping the proposed regulations.
Taxpayer Considerations
With the growing number of jurisdictions announcing their position in implementing the SSA, U.S. taxpayers who are part of multinational enterprise groups would benefit from taking time to perform a preliminary evaluation on the SSA-related items. U.S. taxpayers may want to evaluate their potential qualification for application of the SSA in the U.S. to any relevant controlled transactions, as well as the benefits of electing to apply the SSA (either under U.S. law or foreign law) while taking into account the following factors: potential changes needed in the internal administrative and operational process from a transfer pricing perspective, as well as potential transfer pricing audit risk and tax implications, e.g., double taxation risk, based on the regulatory development related to Pillar One Amount B in the counterparty jurisdictions. Certain key aspects that the U.S. taxpayers may need to discuss internally and with external transfer pricing advisors include—but are not limited to—data sources and segmentation and the extent and nature of documentation required to create and maintain for the SSA application.
If you have any questions or need assistance, please reach out to a professional at Forvis Mazars.
- 1https://www.irs.gov/pub/irs-drop/n-25-04.pdf.
- 2https://www.oecd.org/en/publications/pillar-one-amount-b_21ea168b-en/full-report.html.
- 3The election to apply the SSA would not be valid if any relevant party (that is, the distributor, the related supplier, or either tax administration) demonstrates that the comparable uncontrolled price method described in U.S. Treasury Regulation Section 1.482-3(b) using one or more internal comparables can be applied more reliably than the SSA and chooses to apply such method instead of the SSA.