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IRS RELEASES GUIDANCE ON NEW TRANSFER PRICING METHODOLOGY

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PUBLISHED

December 19, 2024

After years of debate and negotiation, the Organization for Economic Cooperation
and Development’s (OECD’s) Pillar One, Amount B has taken a major step forward
with the IRS’s release on December 18, 2024, of Notice 2025-04: “Application of
the Simplified and Streamlined Approach under Section 482.”  

The notice announces the intention of the U.S. Department of the Treasury and
the IRS to issue proposed regulations to implement the OECD’s Amount B for U.S.
taxpayers by introducing a new transfer pricing method, the simplified and
streamlined approach (SSA), to Reg. §1.482.

The notice states that U.S. taxpayers can elect to apply the SSA as a safe
harbor for tax years beginning on or after January 1, 2025. Prior to the release
of proposed regulations, taxpayers can rely on the guidance in the notice in
conjunction with the report the OECD published in February 2024, “Pillar One –
Amount B: Inclusive Framework on BEPS” that was incorporated into the OECD
Transfer Pricing Guidelines for Multinational Enterprises as an annex to Chapter
IV.

The notice also states that Treasury and the IRS expect that the proposed
regulations will not deviate significantly from the OECD report. Therefore, the
notice does not “restate or address every element of the Report.” It does,
however, provide some U.S.-specific information regarding the SSA, including how
taxpayers are to make the election to apply it, and its interaction with U.S.
documentation requirements under Reg. §1.6662-6. 





BACKGROUND

The OECD report on Amount B provided a simplified and streamlined approach for
determining the returns to baseline marketing and distribution activities for
intercompany transactions involving tangible goods. The approach allows, in
certain circumstances, distributors who purchase tangible goods from related
suppliers for resale to determine their transfer pricing using a simplified
approach rather than a full transfer pricing benchmarking analysis.

The U.S. has been a strong supporter of Amount B; the notice represents the
adoption of the principles of the OECD report in U.S. transfer pricing guidance.





NOTICE 2025-04

The notice indicates that the IRS is implementing the SSA effective January 1,
2025. The SSA will be available to both inbound U.S. distributors that purchase
tangible goods from non-U.S. related parties and to U.S. manufacturers selling
tangible goods to outbound non-U.S. related parties. At a minimum,
implementation will be in accordance with Option 1 of the OECD report, which
allows the SSA to be applied only if a taxpayer elects for it to apply. Treasury
and the IRS are considering whether the proposed regulations should also allow
the IRS to apply the SSA, even if the taxpayer does not elect to apply it
(Option 2), presumably in an audit context.

The notice contains instructions on how a taxpayer can make the election to
apply the SSA. The election would be made by filing a statement with the
taxpayer’s original tax return for the year indicating the transactions to which
the taxpayer intends to apply the SSA, and providing other information specified
in the notice. The SSA would apply on a transaction-by-transaction basis for the
tax year for which the election is made. However, Treasury and the IRS are
considering alternatives to the transaction-by-transaction and year-by-year
election.

The notice also provides guidance on the documentation required to enable the
IRS to verify that the taxpayer has complied with the SSA. These documentation
requirements supplant those specified in Reg. §1.6662-6, although there is some
overlap. 

Some specific books and records that need to be maintained include: 

 * An intercompany agreement between the supplier and related distributor that
   supports the application of the SSA; 
 * Detailed financial data necessary to confirm the application of all steps of
   the SSA as delineated in the OECD report; 
 * Non-financial information necessary for application of the SSA; and 
 * Several statements affirming compliance with aspects of the SSA.





REQUEST FOR COMMENTS

The notice requests comments on all SSA-related topics, and three specific
issues:

 * Whether application of the SSA should be determined solely by the taxpayer’s
   election (Option 1);
 * Whether there should be SSA elections other than on a
   transaction-by-transaction basis or tax year-by-tax year basis; and
 * The selection of 30% as the cap in the operating expense cross check
   (cap-and-collar) calculation  

Comments must be submitted by March 7, 2025.


BDO INSIGHTS

For some multinational enterprises with intercompany transactions involving the
purchase/sale of tangible goods, the SSA could be a useful, simplifying
alternative to transfer pricing benchmarking. The extent to which it is adopted
by U.S. manufacturers and distributors will depend on a variety of factors,
including how many countries – other than the U.S. -- agree to accept it. 

Every multinational with either a distributor or manufacturer of tangible goods
in the U.S. and intercompany transactions involving those tangible goods should
evaluate whether the application of the SSA would be practical and beneficial.
In some cases, application of the SSA may not be practical because the tax
authority on the other side of the transaction will not accept it. In other
cases, the SSA could provide a useful simplification of at least some transfer
pricing compliance requirements, in particular in cases in which there have been
challenges in developing traditional benchmarks. 

BDO transfer pricing specialists can assist in evaluating the transfer pricing
landscape of manufacturers and distributors, including whether adoption of the
SSA would be advantageous.


Please visit BDO’s Transfer Pricing Services page for more information on how
BDO can help.


AUTHOR(S)
Laurie Dicker
National Tax Office, Technical Practice Leader - Transfer Pricing
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the BDO network and for each of the BDO Member Firms. BDO USA, P.C., a Virginia
professional corporation, is the U.S. member of BDO International Limited, a UK
company limited by guarantee, and forms part of the international BDO network of
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OPT-OUT OF TARGETED ADVERTISING – DO NOT SELL OR SHARE MY PERSONAL INFORMATION

BDO USA uses third party cookies and similar technologies to deliver targeted
advertisements, also known as data “sharing” and/or “selling” under California
law, as further detailed in our Privacy Policy. In accordance with applicable
law, we provide you with the ability to opt out of these activities. If you
opt-out below, we will no longer send you targeted advertisements based on
information we collect when you visit this website from your web browser. Please
note that if you visit this website from a different browser or device, or if
you “clear” your cookies or otherwise reset your browser settings, you may need
to re-submit your opt out preference.
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