On December 18, 2024, Notice 2025-04 was released, announcing that the Department of the Treasury and the Internal Revenue Service (IRS) intend to issue proposed regulations that, for purposes of applying section 482, provide a new method for pricing certain controlled transactions involving baseline marketing and distribution activities. This method, known as the Simplified and Streamlined Approach (SSA), aims to alleviate administrative burdens, reduce compliance costs, reduce the likelihood of lengthy cross-border tax disputes, and increase tax certainty for both tax administrations and taxpayers.
Understanding the SSA
The SSA is designed to simplify the application of transfer pricing rules for baseline marketing and distribution activities. It is based on the principles outlined in the OECD’s report titled “Pillar One – Amount B: Inclusive Framework on BEPS,” published on February 19, 2024. The SSA is similar to the comparable profits method under Treasury Regulation sections 1.482-3(a)(4), 1.482-5, and 1.482-9(a)(5) and (f), also known as the transactional net margin method in the OECD Guidelines. The SSA, similar to the safe haven interest rate and the services cost method, aims to balance reliability with ease of administration. However, unlike those methods, the SSA calculates returns based on comparables and is attentive to discrepancies between comparables and tested parties.
Key Features of the SSA
- Simplification and Streamlining: The SSA aims to reduce the financial and compliance burdens on taxpayers and the administrative burdens on tax authorities by providing a simplified method for pricing baseline marketing and distribution activities. While it may be less reliable than the best method in some cases, the reduction in reliability is expected to be modest and offset by the benefits of simplification and streamlining.
- Return on Sales Percentage: The SSA determines a return on sales percentage for the distributor by reference to a pricing matrix derived from a global dataset of comparables. This matrix considers various industry groupings and levels of net operating asset intensity and operating expense intensity.
- Operating Expense Cross-Check: To ensure the appropriateness of the SSA, an operating expense cross-check mechanism is used. This mechanism establishes upper and lower bounds for earnings before interest and taxes (EBIT)-to-operating expenses ratios, ensuring that the application of the SSA remains appropriate with regard to implied returns on operating expenses.
- Data Availability Mechanism: For distributors located in qualifying jurisdictions, an additional return may be required under the data availability mechanism. This mechanism provides an additional return for distributors in jurisdictions with fewer than five comparables in the global dataset, among other criteria.
Implementation and Compliance
The SSA can be applied to qualifying transactions undertaken by parties subject to U.S. tax for taxable years beginning on or after January 1, 2025, and before proposed regulations are published in the Federal Register. Taxpayers may rely on the SSA for their U.S. tax reporting if they apply the guidance in its entirety and in a consistent manner.
To elect the SSA, taxpayers must file a statement titled “Election to apply the SSA” with their original return for the taxable year, indicating the transactions to which the SSA applies. The statement must include a basic description of each transaction, identify the entities participating in each transaction, and specify the entities’ respective places of incorporation or jurisdiction of tax residence.
Taxpayers opting to utilize the SSA for their transactions must keep sufficient documentation to show that they reasonably concluded their transactions are within the SSA’s scope and that they accurately calculated the return as specified by the SSA guidelines. This documentation must be available when filing the return and provided to the IRS within 30 days if requested during an audit of the relevant taxable year. The documentation requirements outlined in section 4.07(2) of the notice supersede the requirements stated in Treasury Regulation section 1.6662-6(d)(2)(iii)(B) and (C) for controlled transactions where a valid election to apply the SSA is in place.
Analysis and Conclusion
As multinational enterprises navigate the complexities of global business, the SSA offers a practical solution to reduce compliance costs and administrative burdens. By adopting the SSA, taxpayers may be able to achieve greater tax certainty and focus on their core business activities. Tax departments must be cautious and model the implications for your organization based on your specific situation.
Notably, until more jurisdictions adopt Pillar One – Amount B, the SSA may actually lead to increased, rather than decreased, audit disputes around returns for marketing and distribution activities. Specifically, the Notice warns US taxpayers to “carefully consider section 8 of the Report and potential inconsistencies between jurisdictions’ policies with respect to the SSA in deciding (i) whether to elect the SSA under U.S. law or foreign law, (ii) whether to otherwise rely on the SSA, or (iii) the extent and nature of documentation to create and maintain.”
Contact GTM for Help
GTM’s transfer pricing team brings extensive industry expertise to each project, providing customized solutions that enhance tax strategies and bolster global operations. Whether managing intricate transfer pricing documentation or strategizing for international growth, our tailored approach guarantees alignment with your company’s unique goals. By leveraging our global tax network, WTS Global, GTM delivers cohesive support across multiple jurisdictions, ensuring reliable service and strategic coherence internationally. Contact us to learn about the implications of Pillar One – Amount B for your company and explore how electing the SSA might be beneficial for your business.
