IRS Notices Adoption of Amount B; Transfer Pricing Penalties Still in Play
The IRS has issued guidance providing for a “simplified and streamlined approach,” or SSA, to transfer pricing for marketing and distribution activities that is expressly reliance-eligible for taxable years beginning on or after January 1, 2025. The guidance—released December 18 in the form of Notice 2025-04—attempts to bring the United States into conformity with one component of Pillar 1, a set of proposals developed by the Organization for Economic Cooperation and Development (OECD) to tackle certain tax challenges presented by digitalization.
Pillar 1 would determine the attribution of income to market jurisdictions through two components: “Amount A,” which aims to reallocate profits of multinational enterprises (MNEs) to market jurisdictions regardless of whether such MNEs have a taxable or other physical presence there, and “Amount B,” which aims to simplify the application of the arm’s length principle to baseline marketing and distribution activities by providing a standardized pricing method, the SSA, under which the criteria for determining appropriate returns are so unambiguous that the process largely can be automated—and has been, in the form of the OECD’s Pricing Automation Tool, released December 19. Although the outlook for Amount A remains murky, with the Notice, the United States has taken the lead in making Amount B a reality.
Key Takeaways from Notice 2025-4
The Notice adopts Amount B as designed by the OECD near-wholesale. It (i) expresses the IRS’ intent to propose regulations that implement the substance of the SSA in its entirety and (ii) provides interim guidance to U.S. taxpayers on applying the SSA to covered transactions. Under the interim guidance, before applying the SSA to any transaction for any taxable year, taxpayers must:
- Confirm that the transaction is eligible for application of the SSA because it is either a controlled buy-sell marketing and distribution transaction of a wholesale distributor that sells to unrelated parties, or a sales agency and commissionaire transaction where the sales agent or commissionaire contributes to one or more associated enterprises’ wholesale distribution to unrelated parties;
- Confirm that the transaction is in-scope (e.g., by meeting a maximum operating expenses-to-revenues ratio);
- Elect to apply the SSA to the transaction by filing with its original return a statement identifying the transaction covered by the election; and
- Maintain (and provide to the IRS within 30 days of an examination request) contemporaneous records and documentation sufficient to allow the IRS to verify that the transactions are SSA-eligible, in-scope, and priced consistently with the SSA.
If a taxpayer meets the requirements outlined in the Notice, the SSA is considered the best method for transfer pricing under Treasury Regulation section 1.482-1(c), and the arm’s length range and interquartile range concepts set forth in Treasury Regulation section 1.482-1(e) do not apply. An electing taxpayer need not consider or document its bases for rejecting other methods but is bound by its election, unless any relevant party demonstrates that the comparable uncontrolled price method using one or more internal comparables can be more reliably applied.
If the requirements outlined in the Notice are met—i.e., if the transaction is both SSA-eligible and in scope, and the taxpayer has properly elected to apply the SSA—the IRS may challenge only the taxpayer’s calculations. And if the taxpayer “reasonably” concluded that it met the requirements outlined in the Notice and correctly applied the SSA mechanics, and also maintains and provides documentation as prescribed in the Notice, the IRS may not assert the accuracy-related penalty of section 6662 in connection with any adjustments.
Considerations for Electing into the SSA
The Notice treats the SSA as a safe harbor, like the services cost method of 1.482-9(b) and the safe haven interest rates of 1.482-2(b). This makes sense since, in theory, Amount B could allow U.S. taxpayers to price transactions in a manner that produces less than arm’s length U.S. taxable income. In those situations, taxpayers will “underpay” U.S. tax. Whether that is desirable for the taxpayer turns on relative tax rates in the countries that are party to the SSA-covered transaction, whether those countries participate in Amount B, and the taxpayer’s general desire for certainty. Where Amount B produces more U.S. taxable income than the “best method,” taxpayers will overpay U.S. tax. Whether this outcome is desirable in any particular case similarly depends on how the counterparty country would have taxed that additional income.
Consistent with the IRS’ view as expressed in the Notice, we expect that application of the SSA generally will produce results that are consistent with the arm’s length standard. Whether Amount B will also achieve the objectives articulated in the Notice—in particular, reducing compliance costs and reducing the likelihood of lengthy and expensive cross-border transfer pricing disputes—will depend on whether and how other countries implement Amount B. Thus, even when the “math” looks appealing, we would counsel caution to taxpayers considering an SSA election, especially for a material transaction.
Even if a counterparty jurisdiction has adopted Amount B, unless it has committed, as the IRS has done in the Notice, to refrain from imposing a different transfer pricing method if a transaction is SSA-eligible and in scope, taxpayers should exercise caution. Amount B may prove to be much ado about nothing if the counterparty jurisdiction has reserved the right to set its results aside when a traditional transfer pricing analysis produces a more favorable outcome. Moreover, bilateral acceptance of the SSA may mean only that the locus of disputes shifts from method choice and comparables selection to whether the transaction is in fact SSA-eligible. Taxpayers seeking certainty thus should weigh the benefits and risks of adopting Amount B against those of other tax certainty tools, such as advance pricing agreements.
Furthermore, the Notice provides no guarantee that application of the SSA will avoid transfer pricing penalties. The Notice does elevate the SSA to the level of a “specified” method for eligible transactions. However, whether the taxpayer’s conclusions as to a transaction’s eligibility and in-scope status and the taxpayer’s calculations under the SSA were “reasonable” may be within the eye of the beholder. If the IRS concludes that some other method is best (and would produce more U.S. taxable income), it still could assert penalties on the basis that the taxpayer’s conclusions were unreasonable. Several recently docketed cases, including Perrigo, Amgen, Microsemi, Eaton, Sysco, Newell Brands and Airbnb, evidence the IRS’ renewed commitment to asserting penalties when it deems a taxpayer’s method selection unreasonable. SSA-electing taxpayers thus should continue preparing robust transfer pricing documentation—including explanations for why other methods are not more reliable than the SSA and/or corroborate its outcome—to mitigate penalty risk.
For U.S. taxpayers electing to apply the SSA, the OECD’s Pricing Automation Tool, a downloadable Excel file, potentially simplifies compliance. Although the tool cannot evaluate qualitative scoping criteria, it is a valuable resource for quantitative assessments. It automates calculations for key elements of the SSA, including the application of the pricing matrix and the operating expense cross-check, and OECD has committed to releasing regular updates, such as when the pricing matrix is revised. Notably, however, the Tool was issued after, and so was not addressed in, the Notice. Consequently, it is unclear whether the IRS would consider the Tool fully compliant with the SSA as a substantive matter, and also the extent to which a populated copy of the Tool would satisfy the documentation requirements prescribed in the Notice. Taxpayers should therefore carefully consider the timing and specific purpose of their use of the Tool.
Conclusion
The Notice demonstrates the IRS’ commitment to ensuring its transfer pricing rules remain harmonized with OECD standards. By emphasizing simplification and certainty, the SSA offers U.S. taxpayers a practical framework for pricing baseline marketing and distribution activities. However, taxpayers should carefully evaluate and document whether transactions are SSA-eligible and in-scope, weigh the considerations discussed in this Alert, and consult with experienced U.S. tax and transfer pricing counsel before making an election.
For more information on how the Notice impacts your operations or to discuss whether the SSA makes sense in a particular case, please contact the Caplin & Drysdale attorneys identified below. Jose Perez, Caplin & Drysdale’s International Tax Intern, contributed to the alert.
