The Internal Revenue Service (IRS) has released Notice 2025-04 announcing the IRS and US Department of the Treasury’s intention to issue proposed regulations implementing “Amount B,” the OECD’s new method (also known as the simplified streamlined approach (SSA)) for pricing certain baseline intercompany marketing and distribution services.
The new method is described in the OECD’s 49-page report dated February 19, 2024 (the Report). [1] Notice 2025-04 (the Notice) [2] states that the forthcoming proposed regulations are expected to “implement the substance of the Report in its entirety.” [3]
The SSA was designed to be a “simplification measure” for the pricing of in-scope distribution arrangements and is similar to the US Treasury Regulations’ comparable profits method and OECD Guidelines’ transactional net margin method. It draws on general principles from the OECD’s Transfer Pricing Guidelines and aims to reduce transfer pricing disputes, minimize compliance costs, and enhance tax certainty.
The SSA method only applies to “baseline” distribution service arrangements, that is, arrangements in which the service provider does not utilize unique or valuable contributions and does not assume economically significant risks. Additional scoping criteria are summarized in the chart below .
Under the SSA, a taxpayer may elect to price in-scope marketing and distribution service transactions by reference to a matrix that contains returns derived from a global set of comparables. [4] The arm’s-length return in a given case is (1) expressed as a percentage return on sales and (2) a function of the distributor’s industry grouping (shown in columns of the pricing matrix) and its net operating asset and operating expense intensities (shown in the rows of the matrix).
Once an arm’s-length range is determined by reference to the matrix, a “cross-check” is performed to ensure that application of the method is appropriate given the implied returns on operating expenses. Where necessary, adjustments are made to address geographical differences and data availability gaps.
The Notice signals that the proposed regulations will incorporate the SSA as a safe harbor under Section 482. If a taxpayer makes a valid election to apply the SSA with respect to an in-scope transaction, the Commissioner will consider the SSA to be the “best method.” Elections must be made on a transaction-by-transaction basis with respect to the taxable year for which the election is filed, and detailed records must be maintained (as described in Section 4.07 of the Notice). While the method is intended to operate as a safe harbor, disputes may still arise with respect to whether a transaction is an in-scope transaction, whether a valid election was made, and/or whether the income allocation was properly calculated.
The SSA is available to US taxpayers for taxable years beginning on or after January 1, 2025. US taxpayers who elect to use the SSA before proposed regulations are issued may rely on the Report and the Notice for guidance. The Notice indicates that elements of future SSA guidance may be addressed in subregulatory guidance (such as a revenue procedure), which would be incorporated by reference into future regulations.
Safe Harbor
The SSA safe harbor will certainly be beneficial for taxpayers in some respects, particularly to the extent it remains optional. The Report provides for two mutually exclusive options for jurisdictions to apply the SSA. Under Option 1, a jurisdiction can allow the taxpayer to elect to apply the SSA. Under Option 2, notwithstanding whether the taxpayer has elected to apply the SSA, a tax administration that has implemented the SSA can apply it to a nonelecting taxpayer.
The Notice explains that the proposed regulations shall, at a minimum, be consistent with Option 1, which would permit a taxpayer to elect to apply the SSA. The Treasury Department and the IRS, however, continue to consider (and seek comment on) whether proposed regulations should permit the IRS to apply the SSA to in-scope transactions consistent with Option 2 or to require some level of consistency in a taxpayer’s application of the SSA, such as requiring its application to all in-scope transactions carried out by a taxpayer, to specific categories of in-scope transactions, or to a single in-scope transaction for multiple years.
The selection of Option 2 by the Treasury Department and IRS may potentially have some unintended consequences. First, the selection of Option 2 could force a taxpayer to apply a non–arm’s length method to price an intercompany transaction, as the SSA is only expected to approximate the results under the best method in most cases. The government should try to avoid forcing a taxpayer into a transfer pricing method that is not the best method. Second, if Option 2 provides the IRS a choice between using the SSA or a traditional transfer pricing method for each taxpayer’s in-scope transactions, this creates an incentive for the IRS to select the method that produces the largest adjustment.
Third, until it is clearer how widely adopted the Amount B rules will be around the world, [5] forcing taxpayers to apply the SSA may result in increased compliance costs and decreased tax certainty for taxpayers (if other jurisdictions do not adopt the framework), [6] in contravention of the simplifying purpose of Amount B. Finally, the IRS has not had the best track record when attempting to affirmatively use safe harbors or simplification methods against taxpayers, and as such the Treasury Department and IRS should proceed with caution as they consider mandating the application of the SSA under Option 2. [7]
Planning Considerations
A number of practical structuring and documentation issues should be considered by any taxpayer contemplating using the SSA. As noted above, the SSA is limited in its application to baseline service arrangements in which the service provider does not utilize unique or valuable intangibles and does not assume economically significant risks. Taxpayers seeking to apply the SSA to a transaction should review the qualifying and scoping limitations in a thorough functional analysis and document the contractual arrangement in a contemporaneous [8] intercompany agreement that clearly addresses the allocation of risks and functions between the parties.
Preexisting intercompany agreements may require amendments to address the SSA qualification and scoping considerations. For example, taxpayers may have an existing intercompany agreement that combines in-scope and out-of-scope functions and/or risk allocations in a single contract governing multiple products and/or distribution channels (e.g., a master distribution agreement). Such an agreement may complicate—or preclude—the taxpayer’s ability to make an election to use the SSA for a subset of otherwise qualifying transactions.
In such a situation it may be advisable to restructure the existing distribution agreement, potentially separating it into multiple agreements or providing for specific function and risk allocation provisions applicable to discreet transaction streams. [9] Both the Notice and the Report confirm taxpayers are free to structure a transaction to fall within or outside the scope of the SSA requirements. Nonetheless, taxpayers should consider whether any changes to existing contracts, or shifts in obligations, could trigger one or more arm’s-length compensatory payments.
Implementation
Taxpayers who use the SSA will (ostensibly) have a layer of protection regarding their choice of pricing methodology that is not afforded under the Section 482 regulations generally. Under Section 482 in general, taxpayers must determine arm’s-length pricing results using the “best method rule” of Treasury Regulations § 1.482-1(c). This rule creates complexity by requiring taxpayers to evaluate the potential applicability of multiple methods (Treas. Reg. § 1.6662-6(d)(2)(ii)(A)).
In contrast, if a taxpayer “reasonably conclude[s]” that the SSA is applicable, the IRS will not be able to argue that a different method would have been better. [10] Moreover, taxpayers who use the SSA should be able to bypass the annual process of identifying comparables, gathering publicly available financials, making adjustments to data, and determining interquartile ranges. The elimination of these data collection and processing steps may lead to significant savings and reduced risk of IRS adjustments over time.
That said, the SSA framework has not yet been tested in “real life” IRS audits, and taxpayers will therefore need to be especially careful to apply the method in accordance with the terms spelled out in the Notice. One area that may prove contentious is determining whether a particular transaction falls within the scope of the SSA. Some of the qualitative concepts to be considered, such as whether a distributor provides “unique and valuable” contributions to a transaction, [11] are already familiar to taxpayers and examining agents. Whether a distribution transaction qualifies as “wholesale,” however, is not a question that is commonly considered.
The Report distinguishes “wholesale” from “retail” based on whether the sale is to “end consumers,” [12] but that definition is not particularly enlightening. Consider, for example, items that are used in, incorporated in, or substantially transformed as part of the manufacturing process. Would the “end consumers” be the manufacturers and, if so, what is the extent of the transformation required? What if the item is just included with others as part of a kit in a medical device sale? Countries that impose a value-added tax or a consumption tax may contend more regularly with the distinction between wholesalers and end consumers, but there is no obviously analogous US law. It is possible that the IRS, taxpayers, and US courts will draw from the concept of a “reseller,” which is commonly used by states that impose sales tax. Alternatively (or in addition), nontax concepts from other areas of federal law might apply.[13]
The quantitative operating expense test is also new, and its application may prove more complex than it seems at first blush, particularly in cases where a tested party’s operating margin is close to the boundaries of the in-scope range. For example, if the expenses associated with a particular activity are unusually high in Year X, the three-year lookback period could push the transaction out of scope for years X+1, X+2, and X+3 (but not for Year X itself). If final regulations include a mandatory element (such as requiring that an election cover multiple periods), those regulations will also need to specify what happens if a taxpayer is required to use the SSA in a year for which its transactions fall out of scope.
Even if it is relatively clear whether a particular transaction is within the scope of the SSA, the placement of a tested party’s activities in the pricing matrix may lead to disputes, thereby removing the “safe” from “safe harbor.” [14] For example, the Report provides that where the products distributed by a tested party fall into multiple groupings, the return on sales target should be a weighted average of the relevant cells in the matrix based on the proportion of sales falling into each group, but only for product groups that constitute more than 20% of the products distributed. [15]
Adding complexity to that determination, Notice 2025-4 states that “if a sale could be categorized under more than one industry grouping, the more specific grouping must be used.” [16] US courts would presumably employ traditional principles of statutory construction to determine how best to apply these rules together as well as determine which of two industry groups is “more specific.” [17]
For example, if a tested party distributes household paper goods, would the transactions fall within Industry Grouping 1 (which includes “grocery” and “household consumables”) or Industry Grouping 2 (which includes “health and wellbeing products,” “home and office supplies,” and “paper and packaging”)? If Industry Grouping 2 is “more specific” and is therefore the appropriate category for paper towels and toilet paper, must these distribution transactions be priced separately from transactions of other “grocery” products? What if the same transactions include deliveries to grocery stores of both paper products and “perishable goods,” which fall into Industry Grouping 1? Does it matter if 85% of the transaction revenue is from the paper products rather than the perishables?
There are surely many other areas of the SSA that will be tricky to implement. As such, in determining whether and how to apply the SSA, taxpayers should not only analyze their financials to understand the results of the method, but also ensure that their interpretations of the rules can be supported in light of their particular facts.
Documentation Requirements
The Notice provides specific SSA transaction documentation requirements that supplant the existing principal and background documentation requirements of Treasury Regulations § 1.6662-6(d)(2)(iii)(B) and (C). [18] SSA documentation requirements are generally met when sufficient documentation exists to establish a reasonable conclusion that the transaction was within the scope of the SSA, the taxpayer properly calculated its return under the SSA, and such documentation is provided to the IRS within 30 days upon request. [19]
The Notice requires taxpayers to maintain sufficiently detailed books and records to verify SSA compliance. SSA specific documentation includes (1) a statement explaining transaction eligibility under the SSA scoping criteria, (2) all underlying data necessary to apply the scoping criterion and corresponding calculations, (3) detailed distributor financial metrics (current return year and three preceding taxable years), (4) a statement regarding whether distributor financial statements required separation of nondistribution activities, and (5) information necessary to apply the pricing matrix and any other applicable provisions of Section 5 of the Report (Simplified and Streamlined Approach Determinations). [20]
Competent Authority Considerations
As a cautionary note for taxpayers, the Notice recognizes that a competent authority cannot support a taxpayer’s SSA position if the opposing competent authority’s jurisdiction has either not implemented the SSA or has not agreed to accept the taxpayer’s SSA application. In these situations, the competent authorities would apply the traditional transfer pricing rules.
The Report and Notice warn competent authorities against using the pricing matrix as guideposts (either a floor or ceiling) when the SSA does not apply. But taxpayers should be aware that there is already anecdotal evidence of competent authorities using the pricing matrix to support a traditional transfer pricing adjustment. Moreover, jurisdictions may also vary in their interpretation of the SSA’s requirements, leaving taxpayers with decreased tax certainty and requiring competent authority resolution.
For these reasons, the IRS advises taxpayers to carefully consider Section 8 of the Report (Tax Certainty/Double Taxation) and potential inconsistencies between jurisdictions’ SSA policies in deciding: (1) whether to elect the SSA under US law or foreign law, (2) whether to otherwise rely on the SSA, or (3) the extent and nature of documentation to create and maintain. If “opposing” jurisdictions do not apply the SSA, a taxpayer that elects to apply the SSA may be required to maintain both traditional transfer pricing documentation for the opposing jurisdiction and SSA documentation for US purposes.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following:
[1] OECD (2024), Pillar One - Amount B: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. Amount B is a subcomponent of the OECD/G20’s “Two-Pillar Solution” to address tax challenges arising from the digitalisation of the economy. Pillar One—of which Amount B is a subset—ensures that profits earned by certain large multinationals are appropriately allocated among the jurisdictions in which such enterprise has activities. Pillar Two creates a minimum effective tax rate that applies to large multinationals regardless of where they are headquartered.
[2] Notice 2025-04 (December 18, 2024).
[3] Notice 2025-04, Section 1.
[4] Transactions are priced by reference to the matrix, except for when internal comparable uncontrolled prices (CUPs) are available.
[5] For example, multiple major jurisdictions have made public statements that they do not plan to move forward with implementing the Amount B rules at this time, including Canada, India, New Zealand, and Australia.
[6] The Treasury Department and IRS understand that there may be “potential inconsistencies between jurisdictions’ policies with respect to the SSA.” Notice 2025-4, Section 4.08.
[7] See IRS’s Implicit Parental Support Guidance “Formalizes” Past Controversy Positions, International Tax Journal (explaining IRS’s ill-fated affirmative use of the safe haven interest rates rules under Treas. Reg. § 1.482-2); Amazon.com, Inc. v. Commissioner, 148 T.C. 108 (2017) (holding that IRS could not disregard cost sharing arrangement election under “realistic alternative” theory because it “would make the cost sharing election, which the regulations explicitly make available to taxpayers, altogether meaningless.”).
[8] Treasury Regulations § 1.482-1(d)(3)(ii)(B)(1) provides that the contractual terms of an intercompany agreement, including the allocation of risks between the parties, that are agreed to in writing before the transaction is entered into will be respected, provided that the terms are consistent with the economic substance of the underlying transaction.
[9] The Report at paragraph 36 also requires that relevant underlying financial metrics (e.g., revenues, direct and indirect costs) and assets be reliably separated in order for the discrete qualifying transaction to remain in scope.
[10] Notice 2025-4, Section 4.04(1). Making the SSA mandatory would be a step back toward older versions of the Section 482 regulations, which did not include a best method rule but instead required taxpayers to prioritize particular pricing methods for specific transaction types. See, e.g., § 1.482-2(e)(1)(ii) of the 1968 Regulations, which mandated the use of the resale price method for transfers of tangible property in cases where no there were no comparable uncontrolled transactions.
[11] Report, Section 3.3 (incorporated into the SSA by Notice 2025-4, Section 5); Treas. Reg. § 1.482-5(c)(i) and (ii), 5(e) Example 4.
[12] Report, Definitions section.
[13] E.g., 29 CFR § 779.328, which provides US Department of Labor rules for distinguishing between “retail” and “wholesale” for purposes of applying the Fair Labor Standards Act.
[14] Report, Section 5.1.
[15] Report, Paragraph 47.a.
[16] Notice 2025-4, Section 3.03(1)(a).
[17] See, e.g., Xilinx v. Commissioner, 598 F.3d 1191 (9th Cir. 2010) (discussing the application of judicial rules of construction to determine the meaning of Section 482 regulations).
[18] Notice 2025-4, Section 4.07(1).
[19] The documentation must be in existence when the return is filed.
[20] For complete SSA documentation requirement details, see Notice 2025-4, Section 4.07(2).