IRS embraces Pillar 1, Amount B transfer pricing approach

The IRS released Notice 2025-04, announcing a new transfer pricing method and allowing for taxpayers to apply the Amount B rules under Pillar 1 while the Treasury and IRS develop proposed regulations and revenue procedures. The IRS refers to the new transfer pricing method as the “streamlined and simplified approach” (SSA).

The notice describes the reasons for the SSA and the implementation, including the requirements, election, and application of the SSA. Taxpayers can elect to apply the SSA as a safe harbor application of the arm’s length standard for taxable years beginning on or after Jan. 1, 2025.

OECD efforts

The Organization for Economic Cooperation and Development (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS) sought to create a consensus around a method for the transfer pricing of baseline wholesale marketing and distribution activities that would provide relief from compliance burdens for taxpayers and enable tax administrations to allocate resources toward riskier and more complex transactions. The SSA is a simplification measure that reflects a carefully balanced tradeoff between reliability and administrability. The SSA determines a return based on comparables and is sensitive to material factual differences between the comparables and tested parties.

On Feb. 24, 2024, the OECD published transfer pricing guidance on Amount B that made simplified transfer pricing rules elective, titled “Pillar One – Amount B: Inclusive Framework on BEPS” (Report). Read our prior coverage on the report, here.

Although consensus was not achieved, the OECD released an optional SSA that taxing jurisdictions could choose to implement. A jurisdiction that implements the SSA may choose from two options:

• Option 1: The SSA can apply only if, among other considerations, a taxpayer elects for it to apply.
• 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.
  

Notice 2025-04

Notice 2025-04 indicates the intention of the Treasury and IRS to allow taxpayers to rely on the OECD Amount B rules while the Treasury and IRS develop proposed regulations and revenue procedures to implement the SSA. The proposed regulations at a minimum, are expected to be consistent with the Option 1 version of the SSA, permitting taxpayers that are subject to U.S. tax with respect to in-scope transactions (both U.S. distributors and U.S-related suppliers) to elect to apply the SSA for taxable years beginning on or after Jan. 1, 2025. The Treasury Department and the IRS are considering whether proposed regulations should also permit the IRS to apply the SSA to in-scope transactions consistent with Option 2.

For U.S. taxpayers, the process of applying the SSA has several key steps:

• First, the transaction must fit within a category of qualifying transactions
• Second, the transaction must be a qualifying transaction (under an upper bound of operating expense-to-venue criterion)
• Third, the taxpayer must elect the SSA
• Fourth, the taxpayer must maintain sufficient permanent books and records that verify that transactions are in-scope
  
  

If the election is made for qualifying and in-scope transactions, taxpayers will need to (among others):

• Determine the relevant industry grouping for the tested party
• Determine the factor intensity classification
• Identify and apply the arm’s length range that corresponds to the industry grouping and factor intensity of the tested party
  

Request for comment

The Treasury Department and IRS request comments from interested persons, and expect to update this guidance as appropriate. Comments on all SSA-related topics are welcome and are solicited in particular on the following subjects:

• Whether application of the SSA should be determined solely by an election by taxpayers, or whether other considerations should also be taken into account, such as the ability of the IRS to apply the SSA in the absence of a taxpayer election, and whether the availability of the SSA for U.S. taxpayers should depend on whether the SSA has been implemented by the counterparty's jurisdiction in order to ensure symmetry of tax treatment
• Whether the possibility posed in section 4.05 of this notice of requiring elections other than on a transaction-by-transaction and taxable year-by-taxable year basis should be subject to any limitations that serve the interests of simplicity or sound tax administration; and
• The selection of 30% as the upper boundary of the operating expense-to-net revenue ratio scoping criterion pursuant to section 3.2 of the Report
  

Written comments should be submitted by March 7, 2025. Consideration will be given to any written comment submitted after March 7, 2025, however, such consideration will not delay the issuance of proposed regulations.

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